There's an exchange-traded fund that is kind of like a proxy for what foreign and institutional investors think of Canada.
The ETF is called the iShares S&P/TSX 60 Index ETF (XIU) and, in the first half of 2015, it saw the largest outflows of any fund in the Canadian market at $1.6-billion. Analysts at National Bank Financial interpreted the money flows for Canada's largest and most liquid ETF as a sign of big investors potentially seeking "to distance themselves from Canada's commodity-driven markets." Looking for a contrarian play for your investment dollars in the second half of the year? Consider Canada.
There's a pervasive sense of disdain for Canadian stocks in the data on ETF money flows for the first half of the year. Five of 10 funds with the largest outflows targeted either the broad Canadian market or particular sectors (financials and materials). Among the 10 funds with the largest inflows, only the BMO Low Volatility Canadian Equity ETF (ZLB) targeted Canada. Call ZLB a tentative bet – it's designed to track the least volatile Canadian stocks, not the broad market.
Canadian investors used to be renowned for their home bias. But after a couple of years of comparatively tepid performance from domestic stocks, they've definitely made the jump to international investing. Four of the ETFs with the largest inflows in the first half tracked either U.S., global or international markets (international means everywhere but North America). National Bank Financial calls international ETFs "the breakout story of 2015."
Here's something I never thought I'd write: Don't forget about Canada, investors. By all means have a strong weighting to global stocks, but don't make the mistake of discounting the domestic market. Stock market returns over the past year show you why. For the 12 months to May 31, the S&P/TSX composite index was up 5.8 per cent. The S&P 500 in U.S. dollars was up almost 12 per cent, and the MSCI EAFE Index in local currencies was up almost 18 per cent. Canada's three- and five-year returns are similarly behind the U.S. and international numbers.
Our market has suffered from its heavy weighting in energy and materials stocks, so the trend of underperformance is totally understandable and may continue for a while yet. But global markets have had a huge rally, while Canada has lagged. For contrarians, that's something to think about in the second half of the year.
Rob Carrick