Daniel Straus' Top ETF Picks: XSUS, MKC and FLGA
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MARKET OUTLOOK
The Canadian ETF market now has over 850 products and $182 billion in assets, and we expect those numbers to keep growing. With the entrance of Accelerate, Picton Mahoney and Emerge since April, there are now 38 ETF providers in Canada. Providers have launched a raft of new alternative ETFs that only recently became available thanks to regulatory changes governing mutual funds in Canada.
Canadian ETFs saw inflows of $12 billion year-to-date, slightly surpassing the figure from the same period last year. Considering the volatility and uncertainty in the market this year, the pace of growth of the ETF industry remains healthy. So far in 2019, fixed income flows more than double that of equity, except for high yield credit products—a possible signal of underlying unease among ETF investors in Canada.
But not all is gloomy. In The U.S., total ETF assets under management crossed the US$4 trillion milestone (that’s trillion with a ‘T’) before dipping back to US$3.9 trillion on backsliding market action. Despite growing volatility, rising alarm over inverting yield curves and disappointing industrial production, National Bank’s economists and strategists write that the U.S. economy isn’t “as bad as advertised.” As a counterpoint to the prevailing pessimism, they point to a buoyant labour market, higher personal savings, low debt ratios, declining interest rates and a “sound financial system” paving the way for thriving consumption.
National Bank’s economists also bring evidence for optimism within domestic markets with employment up an impressive 223,000 for these seven months of 2019, with mostly new full-time jobs. Wage inflation is up, profits are surprising to the upside and the Canadian household sector stands on firm ground.
Canada and the U.S. might offer investors hope, but international markets might puncture our attempts to oppose the bearish consensus narrative. There’s no whitewashing the fact that headlines around the trade war are driving markets through peaks and valleys of confusion. The possibility of a no-deal Brexit is weakening the British pound, tensions are rising between South Korea and Japan, and Hong Kong protests are stoking regional fears. Taken together, the geopolitical picture looks as cloudy as ever. That’s why we’re choosing to highlight a Canadian equity ETF, a U.S. equity ETF and a fixed income ETF in today’s program.
Speaking of fixed income, the Fed delivered the anticipated 25 basis points (bps) rate cut in its July meeting and the bond market is living with the aftermath. The chair’s reference to a “mid-cycle adjustment” threw cold water on the idea of further dovish action, but the ensuing market fit has pulled forecasts out of focus. That said, our economists see two more rate cuts in the U.S., not four, and none in Canada, where the economy is strong. We’ve seen some curve flattening in Canada, but not as pronounced in the U.S. and hard economic data is still not “flashing red.” We published an ETF research note on July 24 (Called ETF Trade Ideas ahead of Fed Easing), where we highlighted different ETF selections to inform investors on some ways to position for the Fed meeting. Since that note was published, our aggregate bond picks for the “consensus” scenario had positive price appreciation of 1.5 per cent to two per cent.
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