7 of the Best Canadian Banking ETFs to Buy in March 2025

ByDan Kent Published On:

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        Key takeaways

        Financial sector resilience – Despite economic uncertainty, Canada’s banking system remains one of the strongest globally, benefiting long-term ETF investors.

        Canadian banks offer strong dividends – ETFs tracking Canadian banks provide stable, high-yield dividends, making them attractive for income-focused investors.

        Different strategies for different goals – Equal-weight, covered-call, and enhanced ETFs cater to various investment styles, from growth to income and risk management.

        One ETF I like way better than the ones on this list.

        Canada’s big banks are considered some of the best stocks in Canada, as well as globally. Often, when newcomers are learning how to purchase stocks in Canada, they are advised to start with these major financial institutions.

        During the 2008 financial crisis, Canadian bank stocks were among the few that didn’t cut or suspend their dividend. Sure, they didn’t raise dividends, but kept their heads above water. Also, most of the Canadian bank’s stock prices were back to pre-crash prices within a year or two.

        So not only have they been highly reliable investments in the past, but they likely will be in the future.

        There’s a catalyst for banks and financial companies in general right now, but also a headwind

        That is higher interest rates, at least relative to before the pandemic. Banks loan money. As such, higher interest rates are a massive positive for bank stocks.

        However, at this point in time higher interest rates are putting substantial pressure on Canadian consumers, particularly mortgage holders. Although banks are making more net interest income, provisions for credit losses are rising and credit quality is deteriorating.

        Investors are worried about the Canadian housing market. Homes simply aren’t as affordable with higher interest rates.

        These banks are well capitalized and have plenty of wiggle room when it comes to added provisions. But it is no doubt something you need to keep in mind if you’re going to be investing in them.

        Despite this, there is still high demand for Canadian bank ETFs

        Canadians and investors worldwide want a piece of Canada’s Big 5 banks, as they are recognized as some of the best dividend-paying stocks in the world. That’s why you won’t find too many Canadian ETFs that don’t have a heavy position towards Canada’s banks.

        Every institution except Scotiabank in these banking ETFs are also Canadian Dividend Aristocrats, signaling more than five straight years of dividend growth. Companies like the Royal Bank, Bank of Montreal, and TD Bank have dividend payment streaks that date back to the 1800s.

        Investors who are worried about buying the wrong stock or don’t want to constantly balance a portfolio of individual stocks can look towards these ETFs for instant diversification across Canada’s six biggest banks. In some cases with the funds I’ll go over below, they give you broad exposure to the Canadian financial sector.

        Niche ETFs like bank funds are exploding in popularity, and there are plenty of niche ETFs here in Canada. A prime example of this would be a niche ETF that covers an asset that has exploded in popularity, Canadian gold ETFs. This piece has become highly relevant as gold is becoming popular again.

        For this piece, however, I’m going to dive into some of the best Canadian banking ETFs in the country.

        So what are the top Canadian banking ETFs?

        Equal-weight exposure to Canada’s Big Six banks

        Hamilton Canadian Bank Equal Weight Index ETF (TSE:HEB)

        HEB holds Canada’s six largest banks in equal weights, offering balanced exposure without overweighting any single institution. It provides a diversified way to invest in the banking sector without relying on market cap weightings.

        • Balanced exposure to the Big Six banks – Unlike market-cap-weighted funds, equal weighting avoids concentration risk in larger banks like RBC and TD.
        • High dividend yield – Canadian banks consistently pay strong dividends, providing a reliable income stream for investors.
        • Lower volatility compared to leveraged funds – Since there’s no leverage, it offers a more stable option than enhanced ETFs like HCAL.
        • Beneficiary of rising interest rates – Canadian banks generally profit from higher interest rates due to improved net interest margins.
        • Potential for long-term capital appreciation – Equal weighting ensures smaller banks like CIBC and BMO get more allocation, allowing for better growth potential if they outperform.
        • Mortgage and real estate trends – Canadian banks have significant exposure to mortgages, and a housing slowdown could affect loan growth.
        • Regulatory changes in the banking sector – Any increased oversight or capital requirements could impact bank profitability.
        • Interest rate movements – Lower rates may pressure net interest margins, affecting bank earnings.
        • Sector concentration – Entirely focused on Canadian banks, limiting diversification.
        • Economic downturn risk – A recession could increase loan defaults and weaken bank earnings.
        • Housing market corrections – Canadian banks have heavy exposure to real estate lending, making them vulnerable to housing downturns.

        1.25x leveraged exposure to Canadian banks

        Hamilton Enhanced Canadian Bank ETF (HCAL.TO)

        HCAL uses modest leverage (1.25x) to enhance returns on an equal-weighted portfolio of Canada’s Big Six banks. It’s designed for investors seeking higher performance with increased risk.

        • Boosted performance through leverage – 1.25x exposure amplifies gains when banks perform well.
        • Enhanced dividend yield – The leverage also increases cash distributions, making it attractive for income-focused investors.
        • Outperforms in bull markets – When banks rally, HCAL can deliver stronger returns than non-leveraged banking ETFs.
        • Diversified across major Canadian banks – Equal weighting ensures no single bank dominates the portfolio.
        • Best suited for long-term bullish investors – This ETF is ideal for those confident in Canadian bank growth over time.
        • Interest rate cuts could impact profitability – If rates fall, bank margins might shrink, reducing HCAL’s performance.
        • Leverage impact in downturns – Volatility is magnified, meaning HCAL can decline more sharply in market corrections.
        • Amplified downside risk – Leverage increases both gains and losses, making it riskier than standard bank ETFs.
        • Higher expense ratio – Leverage increases costs compared to non-enhanced ETFs.

        Equal-weight, non-leveraged exposure to Canadian banks

        BMO Equal Weight Banks Index ETF (TSE:ZEB)

        ZEB holds Canada’s Big Six banks in equal weight, ensuring balanced exposure without favoring larger institutions.

        • Simple, balanced approach – Equal weighting provides exposure to all six major banks without concentration risk.
        • Strong dividend growth – Canadian banks have a history of increasing dividends, benefiting income investors.
        • Lower risk than leveraged funds – Unlike HCAL, ZEB avoids leverage, making it more stable.
        • Earnings growth in banking – Strong earnings support higher share prices and dividends.
        • Regulatory changes – New policies could impact bank lending and profits.
        • Economic downturns impact financials – Banks are cyclical and may underperform in recessions.

        Covered-call strategy for enhanced income

        BMO Covered Call Canadian Bank ETF (TSE:ZWB)

        ZWB uses a covered-call strategy on Canadian banks, generating additional income but capping upside potential.

        • Higher yield from call premiums – Covered-call writing generates extra income.
        • Defensive in volatile markets – The call strategy reduces downside risk.
        • Suitable for income-focused investors – Ideal for those prioritizing dividends over capital appreciation.
        • Market volatility benefits covered calls – Increased volatility raises call premiums, boosting yields.
        • Limited upside potential – Call options cap price appreciation.

        Balanced exposure to banks and insurance companies

        iShares Equal Weight Banc & Lifeco (TSE:CEW)

        CEW provides equal-weighted exposure to Canada’s major banks and life insurance companies. This mix reduces sector concentration risk compared to bank-only ETFs while still capturing financial sector growth.

        • Diversification across financials – Unlike bank-only ETFs, CEW includes life insurance giants like Sun Life, Manulife, and Great-West Lifeco, reducing reliance on bank earnings.
        • Equal-weight approach reduces concentration risk – By giving each holding the same weight, CEW avoids overexposure to the largest banks or insurers, ensuring balanced growth potential.
        • Strong dividend yield – Banks and insurance companies are known for consistent dividend payments, making CEW an attractive choice for income-focused investors.
        • Lower correlation to interest rate movements – While banks benefit from higher interest rates, insurers gain from higher bond yields. This diversification helps balance out rate-related risks.
        • Defensive financial sector exposure – Insurance companies tend to be less volatile than banks, particularly during economic downturns, offering a more stable investment option.
        • Insurance sector growth – Rising demand for life insurance and wealth management services boosts insurers’ earnings potential.
        • Interest rate movements – Higher rates improve insurer profitability but may pressure bank lending.
        • Aging population trends – Increased retirement savings and life insurance demand benefit insurers over the long term.
        • Dual-sector exposure risk – While diversified, CEW is still concentrated in financials, which can underperform in economic downturns.
        • Insurance industry volatility – Life insurers are sensitive to market fluctuations, interest rates, and regulatory changes.
        • Equal weighting may underperform market-cap-weighted ETFs – If larger banks or insurers significantly outperform, CEW may lag due to its even distribution.

        Hybrid fund with stocks, bonds, and preferred shares

        iShares Canadian Financial Monthly Income ETF (TSE:FIE)

        FIE is designed for income-seeking investors, offering exposure to Canadian financial stocks, corporate bonds, and preferred shares. This mix provides stability while maintaining strong yield generation.

        • Diversified financial exposure – FIE holds a combination of major Canadian bank stocks, insurance companies, preferred shares, and corporate bonds, making it a well-rounded income-generating ETF.
        • Monthly distributions for income investors – Unlike many ETFs that pay quarterly, FIE offers monthly income, making it appealing for retirees and income-focused portfolios.
        • Reduced volatility compared to pure equity ETFs – The fixed-income and preferred share allocations provide downside protection during market downturns.
        • Attractive risk-reward balance – While bond exposure lowers growth potential, it also cushions against stock market corrections, making FIE a solid choice for conservative investors.
        • Steady cash flow from banks and insurers – Canadian financial institutions have a strong track record of dividend consistency, ensuring reliable payouts.
        • Interest rate impact on bond yields – Lower rates could benefit bond prices but hurt financial stock margins.
        • Economic recovery effects on banks and insurers – Strong economic growth boosts financial stock performance, increasing FIE’s returns.
        • Shift towards defensive assets – If market volatility rises, demand for income-focused ETFs like FIE may grow.
        • Interest rate risk on bond and preferred share holdings – Falling rates benefit bonds but may negatively impact banks’ profitability.
        • Lower growth potential compared to equity-only ETFs – While FIE is more stable, it won’t appreciate as much as pure banking ETFs in bull markets.
        • Exposure to financial sector downturns – Although diversified, FIE is still highly dependent on the performance of Canadian financial institutions.

        Market-cap-weighted exposure to Canadian financials

        iShares S&P/TSX Capped Financials Index ETF (TSE:XFN)

        XFN tracks the S&P/TSX Capped Financials Index, which includes a broad range of financial sector companies, including banks, insurers, asset managers, and REITs, with a cap on individual holdings to prevent overconcentration.

        • Market-cap weighting favors industry leaders – Unlike equal-weight ETFs, XFN gives more weight to the largest financial institutions, benefiting from their stability and strong earnings.
        • Broadest financial sector exposure – Includes banks, insurers, investment firms, and real estate financial companies, making it more diversified than bank-specific ETFs.
        • High liquidity and institutional adoption – XFN is commonly used by large investors and fund managers, ensuring tight spreads and efficient trading.
        • Strong long-term performance potential – The financial sector is a core part of the Canadian economy, with banks and insurers delivering consistent profits.
        • Diversified dividend yield – Includes a mix of high-dividend payers and growth-focused financial firms, balancing income and appreciation potential.
        • Bank and insurer earnings growth – Strong earnings can drive stock prices and dividends higher, benefiting XFN investors.
        • Regulatory policy changes – New financial regulations could impact profitability, particularly for banks.
        • Mortgage and real estate market trends – Housing market strength affects bank lending and REIT performance within XFN’s portfolio.
        • Heavy exposure to large-cap financials – XFN’s market-cap weighting means it is highly dependent on the performance of big banks like RBC and TD.
        • Sector-specific volatility – Economic downturns can significantly impact banks, insurers, and real estate companies.
        • Regulatory uncertainty – Changes in banking regulations or taxation policies could impact earnings and ETF returns.

        Which Canadian bank ETF is right for you?

        The Canadian bank ETF that is right for you depends largely on your risk tolerance and willingness to pay fees.

        While ZWB engages in covered calls to increase their income, the management fees are also higher. Keep in mind as well that ZWB’s largest holding is ZEB!

        Regarding funds like ZEB and HEB, their equal-weighted nature makes them very easy to duplicate yourself and save management fees, especially when you are on a commission-free trading platform. However, many investors love the idea of monthly distributions and a strong passive income stream.

        If you believe the fees are worth the cost of admission with these ETFs, take advantage of owning the biggest stocks in one of the strongest industries in the world in a single click.

        Are the fees worth it with these Canadian bank ETFs?

        Arguments must be made that these Canadian bank ETFs’ expense ratios aren’t worth it. With minimal holdings, these ETFs can be mimicked in an individual portfolio for as little as $30 in commission costs. In fact, at brokerages like Wealthsimple Trade, you can set them up for free.

        While we agree that even a tiny amount of time every year could have you managing Canada’s six biggest banks individually in your portfolio, those new to investing or those who don’t want to deal with their portfolios will find these bank ETFs extremely useful. So, there are pros and cons.

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