IndexIQ has launched a new ETF which attempts to give investors exposure to small cap Canadian stocks, but as a Canadian you will probably want to avoid this particular ETF for now. It trades with the ticker symbol CNDA.
1. The ETF is listed in the US
While you won’t have to monitor the currency fluctuations while invested, but you will have a forex drag as you would have to convert your money into USD before purchasing the US-listed ETF. Vice versa, you will have to switch it back when you want to sell your investment and spend the proceeds.
2. The MER is higher than what’s available already
The MER is 0.69% for CNDA, but iShares has an ETF with Canadian small cap exposure with an MER of 0.55%. This trades as XCS.
3. Liquidity
ETF liquidity is based on the liquidity of the underlying holdings, so the daily shares that trade are not as useful a gauge as with individual stocks. A designated broker will (usually) ensure that any orders are filled without the ETF price straying too far off of the NAV. Having said that, since this ETF deals with less liquid stocks, liquidity is more of a concern. And since it is new, there is risk that it can shut down if it doesn’t get enough assets to make it viable. The incumbent already has $100 million in assets (the iShares ETF XCS).
4. Index Selection
One of the first things I noticed is that the IndexIQ ETF tracks its own proprietary index for Canadian Small Caps. Presumably this would be to avoid the licensing fee for the S&P/TSX Small Cap Index. You would think the indices looked somewhat similar nonetheless, but you would be wrong. The IndexIQ index has a 50% allocation to materials, whereas the iShares offering is closer to 30%. So there is more than meets the eye. CNDA holds 100 names, but XCS holds 181.
5. Capacity
This is one area where CNDA might have an advantage. It looks like CNDA has a higher market capitalization minimum for inclusion – meaning that companies have to be of a certain size and if they are too small, they are excluded from the index. If there are days when there is a lot of buying or selling pressure on both of these ETFs, CNDA’s index is less likely to suffer from capacity constraints (meaning that the smallest names won’t have their prices materially affected by large purchases and sells). For more explanation on “capacity” or “market impact” click here.
Conclusion
This might be a better ETF for US investors, but Canadians looking for domestic small cap exposure can skip it for now.
Thanks for the analysis, Preet. At first I was a little confused about why this new ETF would be sold in US dollars. However, from looking at the IndexIQ site, it seems that this ETF is primarily aimed at Americans who want exposure to Canadian small caps. They also had an Australian small cap ETF.
Do you know a good global small cap ETF?
@Thick – are you looking for a global or international? (If you are not sure of the difference, Global includes your own country and International excludes your own country).
That being said, two worth taking a closer look at are Vanguard’s VSS which is Global ex-US (so there will be Canadian companies, but not US) but covers developed small caps AND emerging market small caps.
iShares (US) offers an international small cap, IFSM, which covers small caps of developed markets ex-North America. So no Canadian content, no US content, and no emerging market small caps.
0.38% and 0.51% respective MERs.
There are others of course, Wisdom Tree has a dividend weighted small cap international ETF ex-US (DLS), and they also have a dividend weighted small cap emerging markets ETF (DGS). Both are quite popular.
Is there an ETF listed in the US with Canadian bond exposure?