Investing In Canada: Building A Diversified Portfolio

by: Bill Maurer

Sometimes, the best investments are hiding in plain sight. According to Scotia Capital, the real GDP of our friends to the north has increased at a faster pace this decade than the U.S. Likewise, Canada's GDP increased more in 2010 than the U.S. GDP, and 2011 is forecast for similar results. 2012 could be equal, but I'm not convinced current U.S. estimates will stay at these levels.

Why am I bringing up Canada's growth? To build a global diversified portfolio. Look at the following table. Investing in Canada over the long term has produced returns well above those in the U.S. The EWC is the iShares Canada ETF, and the FICDX is the Fidelity Canada Fund. SPY is the S&P 500 ETF of course. For those of you looking for a mutual fund, the Fidelity Fund may be right for you. If you are looking at ETFs, the iShares one is the way to go.

3-month 6 month 1 year 3 year 5 year 10 year 15 year
SPY -10.00% -12.65% 0.85% -0.11% -5.26% 33.78% 111.00%
EWC -15.23% -22.73% -6.95% -6.61% 15.28% 193.65% 290.03%
FICDX -13.97% -20.75% -4.86% -9.21% 16.87% 224.88% 304.75%

As of 8/31, the Fidelity fund had about $4.2 billion in net assets, and as of 9/23 the iShares ETF had about $4.6 billion. Both carry a similar portfolio, with the top 10 holdings mostly the same. The iShares ETF has a few extra holdings, 102 compared to the Fidelity Fund's 90. And as expected, the ETF carries a slightly lower expense ratio, 0.53% to 0.94%. The Fidelity Fund has a 5-star rating from Morningstar.

While these could both be good additions to any portfolio, some investors may be looking to add individual names. So let's look at some individual names, broken down by industry.

Financials: There are five big bank names, and at least 3 are in the top ten holdings for both the Mutual Fund and ETF. They are Royal Bank of Canada (NYSE:RY), Bank of Montreal (NYSE:BMO), Toronto Dominion Bank (NYSE:TD), Canadian Imperial Bank of Commerce (NYSE:CM), and Bank of Nova Scotia (NYSE:BNS). All five of these are close to 52-week lows, but you won't see as much volatility in these names. All can be seen as good value plays, paying from 3.5% to 5% dividends. CM and BMO are the cheapest based on current P/E, and CM has the lowest price to sales ratio of the group. Analysts like TD and BNS the most, based on current ratings.

Miners: Of the five names to focus on here, three are gold miners, Goldcorp (NYSE:GG), Barrick Gold (NYSE:ABX), and Kinross Gold (NYSE:KGC). Barrick is my favorite as it has the highest operating margins and the cheapest valuation. For copper and metallurgical coal, as well as some zinc and lead, you'll want to focus on Teck Resources (TCK). And for silver, go for Silver Wheaton (SLW).

Energy: Four independent oil and gas companies (E&P's) to check out include Canadian Natural Resources (NYSE:CNQ), Encana (NYSE:ECA), Suncor (NYSE:SU), and Imperial Oil (NYSEMKT:IMO). I prefer Suncor because it's the biggest and cheapest, and Encana for its 3% plus dividend. Transcanada (NYSE:TRP) is an energy infrastructure company, similar to a MLP.

Industrials/Utilities: Transalta (NYSE:TAC) is your basic electric utility offering a 5.6% yield. Canadian National Railway (NYSE:CNI) and Canadian Pacific Railway (NYSE:CP) are two good industrials. I prefer the former for its better margins, valuation, and growth potential.

Others: Valeant Pharmaceutical (NYSE:VRX) is a leading diversified drug company. Rogers Communications (NYSE:RCI) is a leading telecom and wireless company. We all know about Research In Motion (RIMM), maker of the Blackberry and other devices. Lululemon (NASDAQ:LULU) is an athletic and apparel company, almost the Canadian version of Nike.

These 17 names I focused on all trade on U.S. markets. All except Lululemon are part of the iShares ETF. If you are looking to be really diversified into Canada, the iShares ETF or Fidelity Canada Fund may be right for you. But if you are just looking to add a little piece, try one of these names out.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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