Energy SPDR, iShares Canada Still Tied At the Hip

It has always bothered me. Why should one be led to believe that he/she is investing in a multi-faceted stock market like Canada, yet achieve no difference from having invested in a U.S. energy fund? (Read more about "interchangeable funds" with countries like Canada, South Africa and Taiwan.)

From March 15 to October 15 of 2007, for example, there was a near perfect correlation between the movement of the iShares Canada Fund (EWC) and that of the S&P Select Energy SPDR (XLE). In effect, a vote for Canada was a vote for "Big Energy."

Then something happened. EWC seemed to take a cue from global credit concerns and macro-economic factors inside of Canada. EWC tanked in November/December of 2007 while XLE rose on the strength of crude oil.

Are these exchange-traded funds finally achieving a bit of separation? Or was this merely a brief disconnect?

One might need to be more inclined to believe the latter; that is, since the start of 2008, XLE and EWC are moving in lockstep once again.

It's no secret that Canada is a natural resources treasure trove. Whether one is mining for metals or gushing over oil, our Canadian friends have got it all.

What is a secret is the extent to which many investors maintain erroneous perceptions about their holdings. And it's not as if the ETF providers will point out the overlap.

More specifically, I have spoken with many who believe they are diversified against U.S. risk by investing in funds like Wisdom Tree International Energy (DKA) and the iShares Canada Fund (EWC). The reality, however, is that the combination may not provide any diversification. Worse yet, a shock to the demand for resources could make the combo "combustible."