7 of the Best Canadian Banking ETFs to Buy in December 2024
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.
Lets go over some of the best Canadian banking ETFs on the market today.
So what are the top Canadian banking ETFs?
- Hamilton Canadian Bank Equal Weight Index ETF (TSE:HEB)
- Hamilton Enhanced Canadian Bank ETF (HCAL.TO)
- BMO Equal Weight Banks Index ETF (TSE:ZEB)
- BMO Covered Call Canadian Bank ETF (TSE:ZWB)
- iShares Equal Weight Banc & Lifeco (TSE:CEW)
- iShares Canadian Financial Monthly Income ETF (TSE:FIE)
- iShares S&P/TSX Capped Financials Index ETF (TSE:XFN)
Hamilton Canadian Bank Equal Weight Index ETF (TSE:HEB)
Hamilton is often known for its high-yielding funds, such as HYLD or HDIV. However, the Hamilton Canadian Bank Equal Weight Index ETF (TSE:HEB) takes a different approach and is more of a total return driven ETF that is based on Canada’s Big 6 banks.
If you are looking for an equal weight banking ETF, this will be one you want to pay close attention to as it has the lowest fees compared to its competitors at 0.25%. This means you’ll pay $2.50 every year per $1000 you have invested in the fund.
The strategy of the ETF is relatively simple: Hold an equal-weight position in Canada’s Big 6 banks. This means you’ll see the typical holdings inside this fund: Royal Bank, Scotiabank, Toronto Dominion Bank, National Bank, Bank of Montreal, and CIBC.
The fund is relatively new, starting in mid-2023, and over that time, it has accumulated nearly $700M in assets under management.
The fund’s lower fee has allowed it to achieve minor outperformance relative to ZEB, but it is almost negligible, at around 0.05%.
The fund has a distribution of around 5%, primarily because the banks are yielding a bit more right now due to lower share prices.
Hamilton Enhanced Canadian Bank ETF (HCAL.TO)
If you’re bullish on Canadian banks, HCAL is a fund you will want to look at. The Hamilton Enhanced Canadian Bank ETF (TSE:HCAL) is a Canadian banking ETF that utilizes leverage to amplify returns.
Before we start, an important note: Leverage goes both ways. So, it’s important to understand that although this fund should outperform basic equal-weight banking ETFs during bull markets, it will underperform during bear markets. The added leverage does add quite a bit to the fund’s fee structure.
At the time of writing, the fund has management fees of just over 2%. This means you’ll pay $20 yearly for every $1000 you have invested in the fund.
Before you think this fund is outrageous when it comes to fees, it is important to understand that leverage ultimately does cost money. This fund will give you access to a 25% leveraged position for cheaper than you’d be able to get as a retail investor, so the high management fee is somewhat justified in this regard.
The amplified leverage also allows this fund to pay out a much higher distribution, which typically exceeds 7%.
The fund’s top holding is simply the ETF we discussed above, HEB. Hamilton then takes a leveraged position against HEB. So, in terms of the underlying holdings, it’s going to be much the same as any other equal-weight fund on this list and contain Canada’s Big 6 banks.
If you’re willing to accept the risks of some added leverage, you’ll want to add this to your watchlist.
BMO Equal Weight Banks Index ETF (TSE:ZEB)
The BMO Equal Weight Banks Index ETF (TSX:ZEB) aims to track Canada’s six largest financial institutions. That’s all this Canadian bank ETF has in terms of holdings.
The overall objective of the ETF is to duplicate the performance of the Solactive Equal Weight Canada Banks Index. The ETF contains the same holdings as the index, along with the proportions of each holding.
At the time of writing, its top holdings are Toronto-Dominion Bank and Bank of Nova Scotia. However, it’s important to note that there is minimal difference between the weighting of the holdings in this ETF, hence the equal weight nature of it. Its largest holding currently sits at around 17%, while its smallest is 16%.
The ETF pays a 4.7%~ distribution at the time of writing. Over the last decade, due to the bull run the banks experienced post-financial crisis, this fund has provided rock-solid returns for investors.
If you’re looking for the simplest, most direct way to invest in Canada’s banks, then this bank ETF is for you.
ZEB used to have a management fee of 0.55%, which was a strong reason for us not recommending Canadians buy it. It was simply too high, considering it had only six holdings. However, the fund recently slashed its fee to only 0.25%, increasing the attractiveness of the banking ETF.
BMO Covered Call Canadian Bank ETF (TSE:ZWB)
Canadian investors looking for a bank ETF that pays a lucrative distribution look no further than the BMO Covered Call Canadian Bank ETF (TSX:ZWB).
This Canadian bank ETF invests in the same holdings as our previous ETF ZEB.
In fact, ZWB’s biggest holding is ZEB.
The critical difference is that the fund generates more income for investors by writing covered call options. What’s a covered call? We’ll go over a very brief explanation.
A “call” is a type of options contract. The “covered” portion is an options strategy where the investor owns the underlying stock. The investor (the fund in this case) will sell call options for the same number of shares (or less) they own.
With a call option, you agree to sell the shares determined within the contract for a specific dollar value if it hits that price point.
You get paid a premium for selling the contract. If the contract expires, you keep your shares and the premium. If the buyer exercises the contract, you sell the shares for the agreed price.
Covered call options are arguably the safest way to trade options. Someone skilled in the strategy can lower their overall volatility. But, covered call ETFs are notorious for underperforming in bull markets.
This is primarily because if stock prices go up, it is bad for sellers of call options, which is why you’ll see ZWB underperforming compared to ZEB.
However, for those not looking to maximize total returns and instead want the highest income possible, the fund has a much higher distribution in the 7% range.
Investors should note the active covered call strategy comes with a higher management fee, with the MER currently at 0.65%. Covered call income may also be treated differently than dividend income when filing your income taxes.
ZWB is not a poor banking ETF. You must know what you’re buying before you buy it and see if it fits your investment style. If you need passive income, go for ZWB. If you want overall returns, you may want to head toward ZEB or HEB, or even potentially HCAL if you’re comfortable with the leverage.
With the bank ETF utilizing a covered call strategy, more work is involved in managing the fund. And as such, expenses are much higher than ZEB.
iShares Equal Weight Banc & Lifeco (TSE:CEW)
The iShares Equal Weight Banc & Lifeco ETF (TSE:CEW) takes a unique spin on the financial sector. It holds equal weight positions in all of Canada’s Big six banks. It contains some of the country’s most popular life insurance companies.
The fund has assets under management of $190M. Regarding the insurers inside the portfolio, you’ll see notable names like Sun Life Financial, Manulife Financial, iA Financial, and Great-West Lifeco.
Considering the fund is equal in weight, the allocations in this ETF are pretty simple. It contains ten stocks and aims to keep a 10% weight on each.
This will never be an exact science. As prices move up and down, the individual holdings will as well. So, the fund may deviate over the short term, and the portfolio manager will rebalance when needed.
At the time of writing, the fund yields just over 4% and has management fees of 0.61%, meaning you’ll pay $6.10 per $1000 invested annually. The fee is a little higher than I’d like to see, as realistically, it is not that difficult to maintain an equal-weight portfolio of ten stocks.
But, it does have the bonus of including insurers and a monthly distribution. Whether or not that is worth it is entirely up to the individual investor.
Total distributions have been slowly increasing over time. However, the distribution often contains capital gains as part of the total income.
This is important to note, as they are treated very differently for tax purposes if you have these ETFs in a taxable account.
iShares Canadian Financial Monthly Income ETF (TSE:FIE)
iShares Canadian Financial Monthly Income ETF (TSE:FIE) provides a unique product for Canadians looking to get exposure to the big Canadian banks and the entire financial sector via common stocks, preferred shares, and bonds.
At the time of writing, one-third of this fund is made up of bonds and preferred shares. So why do we include it on a top Canadian bank ETF list? That’s because a decent chunk of the corporate bonds and preferred shares inside this portfolio are from the big banks.
The fund has assets under management of just over $900M, making this one of the larger funds on the list. In terms of the common stock portion of the portfolio, its top 5 holdings include every major bank here in Canada besides the Bank of Nova Scotia, which just barely cracks the top 10.
The preferred share and bond construction of this portfolio does two things. For one, it increases the yield as preferred shares tend to have larger payouts. And secondly, it decreases the volatility, as both types of securities are often not as volatile as common stocks.
The fund has the highest management expense ratio at 0.85%. However, it also has one of the highest yields in the 7% range, so some may find the excess fees worth it.
Just note that this fund has struggled in terms of overall performance, at least when we compare it to the others on the list. This is likely due to a large part of the fund being made up of bonds and preferred shares. Although you get a higher yield and greater downside protection, capital appreciation will likely be lacking.
iShares S&P/TSX Capped Financials Index ETF (TSE:XFN)
I put this ETF last on this list because it isn’t necessarily a fund focusing exclusively on Canada’s banks. However, it’s a fund I felt needed to be included because it still has very strong exposure. The fund tracks the S&P/TSX Capped Financials Index (TSE:XFN), which comprises Canadian corporations operating in the financial sector.
Due to its broad exposure to the financial sector, Canada’s Big 5 makes up a large portion of this fund. The top 3 holdings, Royal Bank, Toronto-Dominion Bank, and Bank of Montreal, make up nearly half of the fund’s assets. The Bank of Nova Scotia is also in the top 5 holdings, making up around 9% of the fund at the time of writing.
The National Bank of Canada is tucked below a few insurers in the fund. It is the only Big 6 bank with a sub-4% weighting inside this portfolio. It does contain some exposure to lower-yielding insurers and asset managers like Brookfield Corporation, so it only yields just over 4% at the time of writing.
However, this fund has solid past performance, carving out a near 9% annualized return over a 10-year timeframe.
Fees come in at $6.10 per $1000 invested, or 0.61%. So, although it’s not the cheapest fund, it’s not the most expensive. And for its part, it has also produced one of the best returns out of any fund on this list.
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.
There’s a catalyst for banks and financial companies in general right now, but also a headwind
That is rising interest rates. Banks loan money. As such, rising interest rates are a massive positive for bank stocks. With the economy recovering, policymakers must continue increasing interest rates to keep high inflation in check.
If they raise rates too fast and force the country into a recession, banks will have higher loan spreads but lower loan volumes. So, it’s a delicate situation. However, buying and holding them long-term has historically proven to be better than timing it.
Investors are also worried about the Canadian housing market. Homes simply aren’t as affordable with higher interest rates. In addition, many existing variable rate mortgages are in a negative amortization situation.
Interest rates have increased so quickly that borrower payments will need to go sharply higher to keep paying these loans off.
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.
All of the Canadian banks within these ETFs are also Canadian Dividend Aristocrats, signalling 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 Canadian bank ETFs for instant diversification across Canada’s six biggest banks.
There are plenty of “niche” ETFs here in Canada. For instance, have a look at my article on Canadian gold ETFs. This piece has become highly relevant as gold is becoming popular again.
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.
In this article, we will go over the best Canadian bank ETFs and how you can use them in your portfolio to generate capital growth and strong dividend income.