by Jeff Reeves | January 23, 2012 6:00 am
A fascinating study recently was released about upward mobility in America and the state of the middle class. Miles Corak, an economist at the University of Ottawa, found that just 16% of Canadian men born into the bottom one-tenth of the nation’s income bracket remained there as adults. In America, 22% of those in the bottom tier stayed in the bottom tier. Even more interesting is that in America, 26% of those born into the top one-tenth of income brackets stayed there vs. just 18% of Canadians who stayed at the top through adulthood.
I highlight this not to spark a political debate about class warfare — but simply to point out one of the biggest opportunities for investors right now: our neighbors to the north.
Canadian stocks, like their middle class, have fared very well despite the mortgage downturn and resulting global recession. Sure, the Canucks offer no shortage of energy and mining stocks — with giants Suncor Energy (NYSE:SU), Canadian Natural Resources (NYSE:CNQ) and Barrick Gold (NYSE:ABX) as some of the top Canada stocks by market cap — investors should look beyond commodities for opportunities in this nation.
Here are a few reasons why:
Gross Domestic Product in Canada expanded at a 0.9% rate in Q3 of 2011. The average quarterly rate of growth dating back to 1961 is just 0.84% — meaning Canada is not just doing well compared with the 2009 downturn, but it’s also doing well compared with long-term results.
Canada is one of the few developed nations that is a net exporter of energy. As oil hovers around $100 per barrel again and fears of inflation persist, Canada’s economy enjoys some insulation from energy price shocks.
As American banks melted down in 2011, the Canadian bank index hit an all-time high. Royal Bank of Canada (NYSE:RY) is up 13% in the last five years, The Bank of Nova Scotia (NYSE:BNS) is up 22% and Toronto-Dominion Bank (NYSE:TD) is up 34%. Compare that with Citigroup (NYSE:C), which lost 94% in the same period, and Bank of America (NYSE:BAC), which is off 86% in five years.
So how can you invest in the Canadian boom?
The iShares MSCI Canada Index Fund (NYSE:EWC) is a good place to start. It includes all of the aforementioned stocks — with Royal Bank of Canada, TD, Scotiabank, Suncor and Barrick the top five holdings right now.
However, the risk to investors is that this Canada ETF is overweight in these big players — with roughly 32% of the fund tied to financials, 27% tied to energy and 20% tied to materials. That doesn’t really give you a very diverse way to play our neighbors to the north. And with Royal Bank of Canada taking up a whole 6% of the entire portfolio with one position, you might just be better off buying a Canadian financial stock or two and save the 0.54% expense fee of the iShares ETF. Royal Bank of Canada yields a nice 4% dividend to boot, so why not start there?
If you’re looking for a way to get more in touch with Canada’s consumers and broader economy, try Canadian Pacific Railways (NYSE:CP). Like domestic rail stocks Union Pacific (NYSE:UNP) and CSX Corp. (NYSE:CSX), Canadian Pacific is a bellwether for broader economic activity and exports as more freight moves around the rails.
Canada is heavily reliant on metal and oil production, so commodity news really holds sway over the nation’s economy. But don’t underestimate the power of Canadian financial stocks or the stability of its middle class during these tough times. While global investing immediately conjures up images of China or Brazil, don’t overlook our friends to the north if you want to diversify your portfolio.
Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace??.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.
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