Best Canadian Bank ETFs 2024

In this post, we will compare popular Canadian Bank ETFs in terms of performance, MER, Dividend yield and volatility. But first, we will discuss the banking sector futur perspectives.

Executive summary

Banking sector perspectives

• How to explain the great performance of the Canadian banking sector during the pandemic?

News of faster economic growth than anticipated seem to have favored the banking sector in the past months. Large Banks benefited from:

1-Trading: revenues are soaring from an exceptional year. Retail investors were abnormally active and trading much more than usual which increased commissions’ revenues for Banks;

2-Releasing large sums of money that were held in reserves to hedge against expected loan losses due to pandemic. These losses never materialized.

• What’s next for the banking sector?

The Banking sector is poised to benefit from a tighter monetary policy. This is because rising rates will help in boosting profits for banks, insurance companies, discount brokerage firms and asset managers. The difference between short and long-term interest rates is likely to improve banks’ net interest margins.

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HCAL Hamilton Canadian Bank 1.25X Levrage ETF has the highest MER among selected ETFs. Considering that one can easily replicate the portfolio held by most of the ETFs above, it’s wise to choose ETFs that charge minimal fees. ZEB has the lowest MER at only 0.28.

The ETFs above have different strategies that can be summrized below:

Equal weight

An equally weighted portfolio of ETFs is a type of investment portfolio in which all the securities in the portfolio are given the same weight or allocation, regardless of their market capitalization or other factors.

Leverage

A leveraged ETF is an exchange-traded fund (ETF) that seeks to deliver multiples of the daily or intra-day return of an underlying index or asset. Leveraged ETFs typically use financial derivatives such as futures, options, and swaps to achieve their leverage. HCAL uses for instance 1.25 leverage. A 1.25 leverage ETF is an exchange-traded fund (ETF) that aims to provide 125% of the daily return of the underlying index or asset that it tracks.;

Active

An active ETF is an exchange-traded fund (ETF) that is managed by an investment manager who aims to outperform the market or achieve a specific investment objective. Unlike passive ETFs, which track a particular index or benchmark, active ETFs use a variety of investment strategies such as fundamental analysis, quantitative analysis, and technical analysis to make investment decisions and attempt to generate alpha (excess returns) compared to the market.

Passive

mainly XFN, which replicates the S&P/TSX Capped Financials Index. A passive ETF is an exchange-traded fund (ETF) that seeks to track the performance of a specific index or benchmark. Passive ETFs typically hold the same securities as the underlying index or benchmark, in the same proportions as the index or benchmark. They aim to provide investors with exposure to a diversified portfolio of securities at a low cost.

Best Canadian Financial ETFs: Performance comparison

Updated daily

Based on historical performance alone, the ZEB -BMO S&P TSX Equal Weight Banks ETF had the second best performance in the last 5 years. Additionally, the fund pays a dividend yield of around 4%. The management expense ratio is 0.28%, the lowest on our list. ZEB invests in the 6 largest Canadian banks equally.

Another competitor to ZEB is the RBNK – RBC CDN Bank Yield Index fund. This fund is newer and has had the best performance over 5 years. This fund also benefits from a very competitive management fee of 0.33%. The RBNK manager favors in its investment strategy the 2 Canadian banks that offer the highest rate of return (with an allocation of 25% each), followed by the banks that offer the lowest rate of return.

HEWB had the best performance year-to-date and over 3 years. However, this fund does not pay dividends. HEWB is similar to ZEB. Indeed, the fund holds equally the main Canadian banks.

CEW Ishares Equal Weight Banc Lifeco and XFN iShares S&P/TSX Capped Financials Index are also good choices based on long-term performance. Both pay a dividend yield of around 4%.

For those looking for high dividend income, FIE Ishares CDN Fin Mthly Income offers an attractive dividend yield of over 6%. This fund invests about 80% of these holdings in bank stocks and the rest in a preferred stock ETF. HCAL – Hamilton Can Bank 1.25X Lvrg and HCA – Hamilton Canadian Bank Mean Reversion are also good alternatives. The only downside with his funds is the relatively high management fees. For FIE, the long-term return is low compared to other funds.

ZWB – BMO Covered Call Canadian Banks is ideal for investors who want to earn high dividends and lower their risk at the same time. ZWB is what is known as a covered call option writing fund. This type of fund has two purposes:

1- reduce the risk (volatility) of the portfolio by selling covered call options;

2- improve the dividend yield with the premiums earned following the issuance of covered call options.

The major disadvantage of this strategy is that the performance will be lower.

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FIE – Ishares CDN Fin Monthly Income

Ishares CDN Fin Monthly Income seeks to maximize total return and to provide a stable stream of monthly cash distributions. FIE has a high exposure to the financial sector.

FIE Morningstar rating

FIE Dividend ETF holdings

As of October 29th

Sector allocation

Please consult issuers’ website for up-to-date figures

ZEB – BMO S&P TSX Equal Weight Banks Index ETF

The BMO Equal Weight Banks ETF has been designed to replicate, to the extent possible, the performance of the Solactive Equal Weight Canada Banks Index, net of expenses. The index includes the major Canadian banks with a balanced allocation as you can see in the composition of the portfolio below.

Holding details

Please consult issuers’ website for up-to-date data

ZWB – BMO Covered Call Canadian Banks

The ZWB aims to provide exposure to a portfolio of dividend-paying securities (Canadian Banks), while collecting premiums related to call options. The portfolio is chosen on the basis of the criteria below:

• dividend growth rate,

•  yield

• payout ratio and liquidity.

ZWB Morningstar rating

ZWB holdings

Please visit issuers’ website for up-to-date figures

RBNK – RBC CDN Bank Yield Index

RBC Canadian Bank Yield Index ETF seeks to replicate the Solactive Canada Bank Yield Index. The latter is focused only on the Canadian banking industry.

RBNK Morningstar rating

RBNK Holdings

Please consult issuers’ website for up-to-date data

HCA – Hamilton Canadian Bank Mean Reversion 

HCA invests in the 6 largest Canadian banks. This fund differentiates itself by its investment strategy, called “Mean reversion”.

The strategy is applied as follows:

80% of the portfolio in the 3 banks that performed the least well among the 6 largest Canadian banks;
20% remaining in the 3 banks which outperformed.

HCA holdings

As of December 31st

CEW -Ishares Equal Weight Banc Lifeco

CEW Invests in a portfolio of common shares of Canada’s largest banks and life insurance companies.

CEW Morningstar rating

CEW Holdings

HEWB – Horizons Eql Wght Can Banks Index

The Horizons Equal Weight Canada Banks Index ETF (“HEWB”) seeks to replicate the performance of the Solactive Equal Weight Canada Banks Index. The Index is an equal-weight index of equity securities of six Canadian banks.

HEWB Morningstar rating

HEWB Holdings

Please consult issuers’ website for up-to-date data

HCAL – Hamilton Canadian Bank 1.25X Lvrg

Hamilton Enhanced Canadian Bank ETF aims to provide investors with a unique way to participate in the performance of the Canadian banking sector. It’s designed to track 1.25 times the returns of the Solactive Equal Weight Canada Banks Index. Essentially, for every 1% increase (or decrease) in the index, HCAL aims to increase (or decrease) by 1.25%. It achieves this by investing directly in Canadian banks and employing a modest 25% cash leverage. Unlike some other funds, HCAL does not use derivatives.

As at December 29, 2023

Leverage is via cash borrowing (not derivatives), provided by a Canadian financial institution.

HEB HOLDINGS

Hamilton Canadian Bank Equal-Weight Index ETF invests in Canada’s “big six” banks

Please consult issuers’ website for up-to-date data

XFN -iShares S&P/TSX Capped Financials Index

This is a passive strategy ETF. It replicates the performance of the S&P/TSX Capped Financials Index, net of expenses.

XFN Holdings