"One of the best way to capture lower-risk commodity exposure is through funds that invest in Canada," says Mark Salzinger, noting "Much of Canada's economy is tied to natural resources."
In his The No-Load Fund Investor, the long-standing fund expert looks to two ways to invest north of the border: iShares MSCI Canada ETF (ASE: EWC) and Fidelity Canada (FICDX). Here is his review of both.
"Though its population is clustered primarily along its border with the US, Canada is vast: it is the second largest country in the world behind Russia. Unlike most developed countries, Canada is one of the few net exporters of energy.
"As such, the performance of the Canadian stock market has benefited enormously from rising commodity prices over the past several years. Over the past five years, the iShares MSCI Canada ETF has produced a total return of 316%, more than tripling the return of the S&P 500.
"Canada has room to grow its commodities production. Much of its far northern provinces remain untouched by mining or energy interests, and many of its highest potential resources are only now beginning to be exploited.
"Such attractive assets and the growing cash hoards of global natural resources companies have sparked numerous mergers and acquisitions between Canadian companies, further boosting stock prices.
"Going forward, we expect the pace of US investment in Canadian energy reserves to accelerate. Geopolitical issues shut out US energy interests from many of the untapped oil fields in Latin America and Central Asia that Canada is one of the few places available to US concerns.
"US dollar returns on Canadian investment also have benefited in recent years from the rising value of the Canadian dollar relative to the US dollar.
"iShares MSCI Canada invests in the largest Canadian companies, capturing 85% of the Canadian market's capitalization in about 110 stocks. The ETF up a whopping 42.5% year to date through October 31, making it one of the strongest performing non-emerging markets international ETFs.
"Suncor Energy and EnCana, the country's leading oil and natural gas producers, respectively are the portfolio's top energy holdings. Materials companies include miners of both precious and non-precious metals, as well as producters like Potash, Agrium and Aber Diamond.
"About 31% of the portfolio is in financial services companies, Toronto Dominion, Manulife Financial, Royal Bank of Canada, Canadian Imperial Bank of Commerce and Bank of Montreal are all top 10 holdings.
"Fidelity Canada invests in many of the same large Canadian companies as iShares MSCI Canada. Nine of its top 10 holdings are also top 10 positions EWC. Fidelity Canada's performance under manager Maxine Lemieux, who took over in November 2002, has gained a slight edge of EWC in the past year, though.
"Lemieux has incrased exposure to industrials and information technology and through October, Fidelity Canada has gained 45.6% for the year. Over longer periods, though that gap is smaller: the fund's five years annualized return of 32% is just 0.1% greater than EWC.
"Lemiuex has a narrow sleeve of US stocks in the portfolio, recently about 9%. It requires only that 80% of assets be investing in companies tied economically to Canada, so Lemieux has a good bit of leeway to invest outside Canadia.
"As one would expect, iShares MSCI Canada levies a lower expense ratio (0.59%) than Fidelity Canada (0.95%). The choice of the ETF or fund comes down mainly to your purchase habits. The ETF is better you want to invest a lump sum and pocket the ETF's dividend rather than reinvest it (which would entail brokerage costs.)
"The fund is better if you want to dollar-cost average (adding smaller amounts over time) or reinvest dividends in the fund. Generally, when presented with the choice of an index ETF and a similar, but actively managed, mutual funds, it's also wise to pick the ETF for a taxable account and the fund for a tax-deferred account."
Each day, Steven Halpern's TheStockAdvisors.com website features the latest investment commentary and favorite stock picks of the nation's leading financial newsletter advisors.
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