Best canadian bank etf

Best Canadian Bank ETFs 2023

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.

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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Best Canadian Financial ETFs: AUM, MER and Dividend yield comparison

AUM
in M
MER
%
Div
Yld
FIE – Ishares CDN Fin
Mthly Income
9780.895.85
ZEB -BMO S&P TSX
Equal Weight Banks Indx
2,8000.283.08
ZWB –BMO Covered
Call Canadian Banks
2,7000.725.37
RBNK -RBC CDN
Bank Yield Index 
2730.333.13
 HCA -Hamilton Canadian
Bank Mean Reversion 
5510.564.54
CEW -Ishares Equal
Weight Banc Lifeco
2450.613.01
HEWB – Horizons Eql
Wght Can Banks Index
1560.330
 HCAL – Hamilton Can
Bank 1.25X Lvrg
3651.065.38
XFN –iShares S&P/TSX
Capped Financials Index
1,9000.612.66
As of January 31st 2022 – Source: TD Market Research, MER for ZEB was reduced to 0.28% following a reduction announced by BMO in August 2021

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: Holding the 7 largest Canadian banks equally;
leverage: HCAL uses for instance 1.25 leverage. It’s ideal if you are bullish in the banking sector. However, it’s worth noting that leveraging increases rewards and risks;
active: managers will weigh each bank differently within the portfolio based on their research and analysis;
passive: mainly XFN, which replicates the S&P/TSX Capped Financials Index.

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

Rating: 5 out of 5.

FIE Dividend ETF holdings

Company NameAllocation
iShares S&P/TSX Cdn
Prefr Shr ETF Comm
21.1%
iShares Core Canadian
Corporate Bd ETF
10.3%
Canadian Imperial
Bank of Commerce
8.5%
Royal Bank of Canada8.2%
The Toronto-Dominion Bank6.7%
National Bank of Canada6.5%
Manulife Financial Corp6.4%
Power Corporation of Canada6.0%

As of October 29th

Sector allocation

TypeFund
Banks44.96
Insurance30.24
Diversified Financials8.48
Energy5.01
Utilities4.50
Real Estate2.81
Telecommunications1.12
Transportation0.73
Food & Staples Retailing0.57
Cash and/or Derivatives0.41

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.

Rating: 4 out of 5.

Holding details

Weight (%)Name
17,18%BANK OF MONTREAL
16,90%TORONTO-DOMINION BANK/THE
16,78%CANADIAN IMPERIAL BANK OF COMMERCE
16,59%NATIONAL BANK OF CANADA
16,50%ROYAL BANK OF CANADA
15,86%BANK OF NOVA SCOTIA/THE
0,19%CASH

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

Rating: 3 out of 5.

ZWB holdings

NameWeight
BMO Equal Weight Banks ETF27.2%
  Bank of Montreal12.9%
Canadian Imperial Bank of Commerce12.7%
Royal Bank of Canada12.1%
National Bank of Canada11.9%
  The Toronto-Dominion Bank11.9%
Bank of Nova Scotia11.4%

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

Rating: 5 out of 5.

RBNK Holdings

HoldingsAssets
CANADIAN IMPERIAL BANK OF COMMERCE26.7%
BANK OF NOVA SCOTIA23.7%
ROYAL BANK OF CANADA17.1%
TORONTO-DOMINION BANK15.6%
BANK OF MONTREAL8.5%
NATIONAL BANK OF CANADA8.4%

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

NAMEWeight
Bank of Nova Scotia27.9%
Toronto-Dominion Bank27.1%
Royal Bank of Canada26.4%
Bank of Montreal6.4%
Canadian Imperial Bank of Commerce6.2%
National Bank of Canada6.0%

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

Rating: 4 out of 5.

CEW Holdings

NAMEWeight
%
GREAT WEST LIFECO INC10,16
IA FINANCIAL INC10,12
TORONTO DOMINION10,06
NATIONAL BANK OF CANADA10,05
MANULIFE FINANCIAL CORP10,00
BANK OF NOVA SCOTIA9,92
SUN LIFE FINANCIAL INC9,90
BANK OF MONTREAL9,86
CANADIAN IMPERIAL BANK OF COMMERCE9,78
ROYAL BANK OF CANADA9,70

as of Feb 4th, 2022

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

Rating: 4 out of 5.

HEWB Holdings

Security NameWeight
TORONTO-DOMINION BANK17.17%
BANK OF NOVA SCOTIA16.82%
NATIONAL BANK OF CANADA16.77%
BANK OF MONTREAL16.65%
ROYAL BANK OF CANADA16.37%
CANADIAN IMPERIAL
BANK OF COMMERCE
16.23%

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

HCAL – Hamilton Canadian Bank 1.25X Lvrg

The fund invests in HCA — which is designed to closely track the returns of the Solactive Canadian Bank Mean Reversion Index TR, investing in Canadian banks — while adding 25% leverage provided by a Canadian financial institution.

HCAL offers exposure to Canada’s “Big Six” banks with 25% leverage. The fund does not use derivatives.

HCAL holdings

NAMEWEIGHT
Toronto-Dominion Bank27.0%
Bank of Nova Scotia26.6%
Royal Bank of Canada26.5%
Canadian Imperial Bank of Commerce6.7%
National Bank of Canada6.7%
Bank of Montreal6.5%

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

NameWeight
%
ROYAL BANK OF CANADA19.38
TORONTO DOMINION18.36
BANK OF NOVA SCOTIA10.58
BROOKFIELD ASSET MANAGEMENT INC CL10.36
BANK OF MONTREAL9.18
CANADIAN IMPERIAL BANK OF COMMERCE6.87
MANULIFE FINANCIAL CORP5.06
SUN LIFE FINANCIAL INC3.81
NATIONAL BANK OF CANADA3.26
INTACT FINANCIAL CORP3.04

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