We recently published a list of 10 Best Canadian ETFs to Buy. In this article, we are going to take a look at where iShares ESG Aware MSCI Canada Index ETF (TSX:XESG.TO) stands against other best Canadian ETFs to buy.
The State of the Canadian Stock Market
After a slow start in 2024, the Canadian stock market saw a strong third quarter, fueled by domestic rate cuts and a recovery in global markets. Year-over-year headline inflation has cooled to align with the Bank of Canada’s target rate of 2%. As a result, policymakers have implemented four consecutive rate cuts, with an additional 50 basis point reduction anticipated in December. With the central bank expected to keep cutting interest rates to support the economy, stock market strategists are cautiously optimistic that the rally will continue. In this context, Brent Joyce, chief investment strategist at BMO, shared the following:
“The environment is very attractive for equities. It’s been this trifecta of better global growth, interest-rate-sensitive companies themselves, and the interest rate sensitivity of dividends. These were headwinds for the two years that rates were going up, [but they] have flipped into tailwinds for the Canadian stock market now that rates are falling.”
While most stocks are influenced by global factors, many companies on the Toronto Stock Exchange are also cyclically driven, meaning their performance is closely tied to the economy and the business cycle. Given the strong connection between the US and Canadian economies, stable growth in the US has provided a boost to Canadian equities. On that front, Tim Hayes, chief global investment strategist at Ned Davis Research, advises clients to allocate 5% of their equity portfolio to Canadian stocks, making it the second-largest weighting after the 69% recommended for US stocks. The S&P/TSX Composite Index is on track to have its best year since 2009, having set new records 42 times this year and risen 21.09% year-to-date, closely following the S&P 500’s 27.58% gain. Hayes highlighted the broad rally and noted that the market is largely driven by energy and financial stocks, which offer the highest trailing and forward earnings yields, contrasting with the tech sector’s lower yields.
On the other hand, U.S. President-elect Donald Trump rattled the markets earlier in November with a proposal to impose a 25% tariff on imports from Canada and Mexico, aimed at addressing drug trafficking and border issues, along with a 10% tariff on imports from China. This decision had an immediate impact on Canada’s energy sector, which experienced a 2.2% decline amid concerns that rising US crude production would meet domestic demand. At the same time, the Canadian dollar dropped to its lowest level against the US dollar since May 2020, sparking worries about potential inflationary pressures on imports.
Canadian ETFs: Strong Performers in 2024
While the future remains uncertain, the Canadian ETF industry, which began with the world’s first ETF launched in Canada in 1990, has shown notable resilience over the past 30+ years, and continued growth is expected in the years to come. Despite the market volatility this year, Canadian ETFs have managed to navigate the challenges effectively and are well-positioned for another strong year. With only a couple of weeks remaining in the year, the industry is on track to surpass the previous annual record of $58 billion set in 2021. Moreover, following recent data from IFIC showing Canadian ETF sales reached their third-best month ever in October, a new report from research firm ETFGI highlights additional gains in November, along with impressive year-to-date figures. The firm reported net inflows of US$7.5 billion in November, slightly down from the C$8.2 billion reported in IFIC’s October report, but still a strong performance that contributes to the 29th consecutive month of net inflows.
Our Methodology
We have selected the top Canadian ETFs to buy and hold based on their 5-year performance as of December 10, listed in ascending order for clarity. Additionally, we’ve highlighted the top holdings of each ETF to provide valuable insights for potential investors.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
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iShares ESG Aware MSCI Canada Index ETF (TSX:XESG)
5-year Share Price Performance as of December 9, 2024: 50%
The iShares ESG Aware MSCI Canada Index ETF (TSX:XESG.TO) aims to closely replicate the price and yield performance of the MSCI Canada IMI Extended ESG Focus Index. The fund primarily invests in a diversified portfolio of 116 stocks, including large, mid, and small-cap Canadian companies that align with ESG criteria. Established in 2019, it currently manages C$472 million in total net assets.
On December 4, RBC Capital Markets updated its financial outlook for Enbridge Inc. (NYSE:ENB), a major player in energy transportation and distribution with a market capitalization of $95.9 billion and a top holding of the iShares ESG Aware MSCI Canada Index ETF (TSX:XESG). RBC raised its price target for ENB from $59 to $63 while maintaining an Outperform rating. This adjustment reflects a positive view of Enbridge’s 2025 outlook, which highlights a projected EBITDA range of $10.8 billion. RBC noted that consensus estimates remain at the lower end of this range and are based on what it considers conservative assumptions regarding Mainline volumes and the USD/CAD exchange rate.
Enbridge’s renewables segment continues to expand, with projects like the Sequoia Solar Project in Texas becoming one of the largest in North America. This project is largely supported by long-term fixed-price power purchase agreements with investment-grade clients, including AT&T and Toyota. Furthermore, Enbridge Inc. (NYSE:ENB) announced a 3% increase in its quarterly dividend, raising it to C$0.9425 per share, reinforcing its commitment to shareholder returns.
Overall, XESG ranks 7th on our list of best Canadian ETFs to buy. While we acknowledge the potential of XESG, our conviction lies in the belief that certain AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than XESG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
