U.S. Investors Flock to Booming Canada ETF Amid Political Unease

  • Second-best developed equity market on commodity rebound
  • Having a “Kennedy-esque” leader in Trudeau doesn’t hurt either

U.S. investors leery of the outcome of a presidential race featuring two of the most unpopular candidates in history may already be voting with their dollars -- in Canada’s booming equity market.

For the first time since 2010, Canada was the top destination for U.S. investors in foreign exchange traded funds through the first half of the year. The iShares MSCI Canada exchange-traded fund saw $768.1 million in net inflows in the year to June 30, according to data compiled by Bloomberg. U.S. investors pulled $9.63 billion out of Japanese ETFs, $2.28 billion in German funds and $1.63 billion from China in the same period, the data show. A total of 46 countries were examined, including the U.S. which remained the No. 1 destination for domestic investors with $48.3 billion of inflows.

Equity investors are attracted by a resurgence in commodities prices from crude to gold that’s propelled the benchmark S&P/TSX Composite Index to the second-best performance among 24 developed markets after New Zealand.

Aside from its rich exposure to resources, Canadian markets have also emerged as an island of relative calm amid increasing volatility after the U.K. voted to leave the European Union and a contentious U.S. presidential election in November.

The Look

“There’s some trepidation about this fall," said Timothy Ghriskey, who helps manage $1.5 billion as chief investment officer at Solaris Asset Management LLC in New York. "Canada is considered an economy and a society that is stable, with leadership that’s trusted and respected.”

Having a “Kennedy-esque” leader in Prime Minister Justin Trudeau doesn’t hurt either, Ghriskey said. Solaris currently holds some Canadian positions, including beverage maker Cott Corp., Ghriskey said.

“He’s got the look, the political legacy and he’s friendly,” he said, referring to Trudeau’s father, Pierre Elliott Trudeau, who also served as prime minister. “That’s nice to see given what we have in Washington and New York. It’s going to attract capital from the rest of the world and it already has.”

Donald Trump and Hillary Clinton, the presumptive Republican and Democrat candidates for president, are among the worst-rated candidates in the last seven decades according to pollster Gallup based on data collected in June. Trump led with a 42 percent highly unfavorable rating compared with Clinton’s 33 percent. One in four Americans also dislike both candidates, four times higher than in 2008, Gallup data show.

Cinderella Story

American and U.K. voters have researched Canada as a place to live in recent months. Instances of Internet users searching “How to move to Canada” spiked in the wake of the U.K. vote to leave the EU at the end of June, and in March when Trump won a slew of Super Tuesday primaries, according to data from Google Trends.

“Success attracts attention,” Kurt Reiman, BlackRock Inc.’s chief investment strategist for Canada, said by phone from Toronto. “Canada’s been a Cinderella story this year. If you’re a U.S. dollar-based investor looking at Canada you have one of the best-performing developed markets this year and the currency upside, so it’s a nice little combination.”

The Canadian dollar, or loonie as it’s known, has risen about 13 percent to $1.2940 since reaching a 13-year low in January. Trudeau has bucked the global austerity trend and deployed a spend-heavy budget and Bank of Canada Governor Stephen Poloz has maintained a steady hand on monetary policy.

Risky Play?

Metals and energy producers meanwhile have fueled the resurgence in Canadian equities, as top performers including First Majestic Silver Corp. and Teck Resources Ltd. saw their value more than triple in the first half. A gauge of raw-materials stocks soared 51 percent in the same period, the best year-to-date performance for the measure in at least 30 years, according to data compiled by Bloomberg.

“Canada has pretty good fundamentals on the policy front,” Reiman said. “We thought, post-Brexit what stock markets would hold up relatively better, and we said Canada.”

Emanuella Enenajor, a senior economist with Bank of America Merrill Lynch, said Canada is still seen by investors as a risky market dominated by moves in commodities prices.

“This is an environment where commodity-producing countries tied to prices look softer, and there’s a risk around that with Canada,” she said after an appearance on Bloomberg TV Canada. Raw-materials stocks have plunged for five straight years before this year’s rebound, losing 63 percent in that time.

The flows into Canada are being driven by institution trading rather than retail investors, Eric Balchunas, ETF analyst with Bloomberg Intelligence, said in a phone interview. “This is people riding the wave of good fortune. People see Canada start to perform and it looks like a good opportunity.”

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