(Bloomberg) — Canadian investors are pulling money out of exchange-traded funds for a second year as concern grows that a rally in energy and mining that helped drive equities to the best performance among the world's largest markets has run its course.
So far in 2014, investors have withdrawn $682.5 million from exchange-traded funds tracking Canadian shares, following an outflow of $820.8 million last year, according to data compiled by Bloomberg. The benchmark Standard & Poor's/TSX Composite Index is in its 10th month of gains, the longest winning streak since 1983, and has soared 20 percent in the past year. The gauge rose 0.2 percent to 14,557.27 at 10:55 a.m. in Toronto.
The latest ETF selloff comes as a rally in gold and base-metals companies has begun to lag in favor of energy producers. Mining stocks, which raced to a 16 percent gain in the first two months of the year, have slumped by half that rate since reaching a high in March amid a decline in gold prices. Oil and gas companies are off to the best start to the year since 2006.
"Looking at where gold and oil prices are, and where they could be headed in the next 12 months, Canadian equities probably are primed for flatlining," said Shailesh Kshatriya, a senior investment analyst with Russell Investments Group in Toronto. His firm manages C$272.7 billion ($247.2 billion). "Not necessarily a severe correction, but we'd be more cautious on Canadian equities going forward. We are in wait-and-see mode on the sustainability of commodities prices."
Gains in the index this year have been led by a rally in commodities including crude oil and natural gas, as well as a rebound in gold from the worst slump in 31 years. The S&P/TSX has posted a return of 6.7 percent this year to lead the advance among the world's 10 largest equity markets. The Standard & Poor's 500 Index has climbed 1.5 percent in 2014.
International stocks
"I don't think the leadership gap will remain this wide, there will be some catch-up from international stocks," said Craig Fehr, Canadian market strategist at Edward Jones, on the phone from St. Louis. His firm manages about $750 billion globally. "Evidence suggests the domestic economy is going to be a laggard in its growth rate relative to other developed markets, so investors are just looking for better sources of growth and perhaps seeing that in international markets." Canadian investors have added $1.03 billion in ETFs tracking international equities so far this year, after buying a record $3.32 billion last year, data compiled by Bloomberg show. Japan's Nikkei 225 Index is down 11 percent this year, after soaring 57 percent in 2013. The S&P 500 rose 30 percent in 2013, the most since 1997, while the S&P/TSX advanced 9.6 percent.
Global rally
Investors are continuing to add to international positions this year because some may be late in responding to last year's global rally as Canadian stocks lagged, said Dan Hallett, a fund manager at Highview Financial Group Inc. in Oakville, Ontario.
"Rewind about three years ago and even though we were well into the recovery, nobody wanted to touch U.S. stocks," he said in an April 22 phone interview. "Yet now everybody's quite comfortable with the U.S., and why? It's because they had a bang-out year last year."
Historical returns
Hallett estimates retail investors make up about half of the Canadian ETF market, and they can be influenced by historical returns. "Performance is a huge driver at the retail level," he said.
The S&P/TSX will post single-digit returns this year with gold prices remaining volatile and copper tied to a Chinese economy stuck in the 7 percent growth range, Fehr said.
The Canadian economy is forecast to grow 2.3 percent in 2014, compared with 2.7 percent growth in the U.S., according to economists' estimates compiled by Bloomberg.
Gold, the precious metal seen as a safe haven in times of uncertainty, has tumbled since March as the U.S. economy shows signs of improving with the Federal Reserve beginning to taper its debt purchases. June futures touched a 10-week low on April 22 before rising 0.3 percent to $1,284.60 an ounce in New York yesterday.
