The Mother Lode Up North

With vast stores of everything from oil to potash, Canada may be the way to play commodities

Looking for a safer way to play the commodities boom in 2008? Try Canadian stocks. The country is a trove of natural resources, harboring vast crude oil reserves, major deposits of natural gas, gold, aluminum, zinc, and uranium, and large stocks of wheat and timber. As commodity prices have rallied, Canada's stock market, as tracked by the MSCI Canada Index, has racked up a 28% annualized return over five years, more than double that of the U.S.

The stocks are no longer cheap, but there are good reasons to continue investing up north. Since Canada is a developed Western nation, investors don't bear the geopolitical risk of other resource-rich countries. "It's much safer to invest in Canada than the Congo or Latin America, where individual investors' rights aren't always held up in a court of law," says Brian Hicks, co-manager of U.S. Global Investors' Global Resources Fund (PSPFX), who has a 35% Canada weighting in his fund.

Only a handful of funds invest exclusively in Canada: Fidelity Canada Fund (FICDX) and two exchange-traded funds: the iShares MSCI Canada Index ETF (EWC) and Claymore/SWM Canadian Energy Income Index ETF (ENY). However, neither Fidelity's nor iShares' fund is a pure natural resources play, and the Claymore ETF owns only energy stocks. Yet many Canadian stocks trade on U.S. exchanges, and for customers of online brokers such as E*Trade (ETFC) and Interactive Brokers (IBKR), buying directly on Canadian exchanges costs less than $20 a trade.

One top oil play on the New York Stock Exchange (NYX) is Suncor Energy (SU). "Suncor has access to the immense oil sands in Alberta, and it has the infrastructure in place to produce oil there very efficiently," says Timothy Keefe, portfolio manager of the John Hancock Global Opportunities Fund (JGPAX), which has 20% of its assets in Canada. He says in the past 15 years, Suncor's oil production has grown 10% a year, while most producers have trouble breaking 5%. Keefe also holds NYSE-listed Canadian Natural Resources (CNQ), which will be trying to tap Alberta's estimated 174 billion barrels of reserves.

Werner Muehlemann, head of Canadian equities at ING Investment Management Canada (ING), is a fan of Teck Cominco (TSE), which mines zinc, copper, gold, and coal. "It's relatively cheap with a 2008 p-e ratio of 8, compared with 15 for the average diversified miner of its size," he says.

Aside from oil stocks, U.S. Global Investors' Hicks favors Fording Canadian Coal Trust (FDG), a large exporter of the metallurgical coal used to produce steel. The company is negotiating with major steel producers in Asia for its annual price increase. He also likes PotashCorp (POT), the world's largest fertilizer producer, based in Saskatchewan.

Although timber is a major industry, ING's Muehlemann mostly steers clear of the sector except for Forestry Catalyst Paper. The timber business has been suffering from Latin American competition and a strong Canadian dollar that has jacked up prices to U.S. consumers. But lumber is about the only commodity from the Great White North that doesn't look golden.

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