It has been a tricky couple of months for international stocks. Even Canada, a market that is barely more risky than the U.S., has seen its stock values slide in dramatic fashion. That’s understandable as Canada, despite being a highly advanced developed market, is viewed as a commodities play due to the country’s abundant oil and minerals reserves. Add to that, the recent environment has been quite unkind to small-caps and it’s easy to see why investors have shunned an ETF such as the IndexIQ Canada Small Cap ETF (NYSE: CNDA).
Over the past year, CNDA, the first ETF devoted exclusively to Canadian small-caps, has plunged almost 28% and the past month has been nothing to write home about either. Amid wilting oil prices, CNDA has slid more than 6%, a decline that can be blamed on CNDA’s 28.4% weighting to energy stocks.
All of that makes for a grim prognosis, but CNDA does have a secret weapon and that is a 42% allocation to materials stocks. That may sound like a bad thing in the current market environment, but one needs to consider exactly what CNDA’s materials exposure is: Gold and silver miners, two groups that have roared back to life in recent weeks.
Knowing that, things suddenly look a little better for CNDA as a derivative winner on the back of the Canadian economy being treated as a raw materials play. There’s more good news for investors and it comes in the form of what small-caps make up CNDA’s materials and mining constituents. These aren’t fly-by-night, pump-and-dump penny stocks. These are legitimate companies, some of which U.S. investors may already be familiar with such as AuRico Gold (NYSE: AUQ), NovaGold Resources (NYSE: NG), First Majestic Silver (NYSE: AG) and Silvercorp Metals (NYSE: SVM).
While the iShares MSCI Canada Index Fund (NYSE: EWC) is more liquid and far larger than CNDA, it is the sector breakdown of each fund that matters and to that point, an extended rally in small-cap gold and silver miners could lead to CNDA outperforming its larger rival.
EWC is dominated by financial services stocks with that group accounting for 33.5% of the fund’s weight. Materials do get an allocation of almost 20% in EWC, but that group includes fertilizer producers and predominantly large-cap gold miners. That’s fine, but it is the small-cap miners that have been leading the charge higher.
The bottom line with CNDA is that it will need oil prices and energy stocks to rebound at some point to help extend the life of its rally. In the near-term, however, the fund’s precious metals mining exposure makes it a valid backdoor play into one of the only sectors that’s worth a look from the long side at the moment.
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