The Top Canadian Bank ETFs To Buy in 2022 and Beyond

Posted on May 20, 2022 by Dan Kent

Canadian banks are not only some of the best stocks to buy in Canada but in the world. Many investors just learning how to buy stocks in Canada are told to head to Canada's big banks.

During the 2008 financial crisis, Canadian bank stocks were one of very few that didn’t cut or suspend their dividend. Sure, they didn’t raise dividends, but at least they kept their heads above water. Along with this, 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 extremely reliable investments in the past, but they likely will be in the future.

There's a major catalyst for banks and financial companies in general right now

That is rising interest rates. The impacts of the pandemic might not have been as big financially as the Bank of Canada thought. As a result, we might see interest rates rise sooner rather than later. In fact, we already saw the Bank of Canada raise rates in March of 2022, and we can expect multiple raises over the next few years.

Banks loan money. As such, rising interest rates are a huge positive for bank stocks. With the economy continuing to recover, policymakers will need to continue to increase interest rates to keep the economy in check.

This is why there is a huge demand for Canadian bank ETFs

Canadians and investors all around the world 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 Canadian Dividend Aristocrats as well, signaling more than 5 straight years of dividend growth, and companies like the Royal Bank and Bank of Montreal have dividend payment streaks that date back to the early 1800's.

Investors who are worried about buying the wrong stock or those who 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.

In fact, there are plenty of what I like to call "niche" ETFs here in Canada. For instance, have a look at my article on Canadian gold ETFs. This piece has become extremely relevant as gold is becoming popular again.

Are the fees worth it with these Canadian bank ETFs?

There are definitely arguments to be made that the expense ratios of these Canadian bank ETFs just 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.

And while we do agree that even a small amount of time every year could have you managing Canada’s 6 biggest banks on an individual level in your portfolio, those new to investing or those who simply don’t want to deal with their portfolios will find these bank ETFs extremely useful. So, there's definitely pros and cons

In this article, we're going to go over what the best Canadian bank ETFs are right now and how you can use them in your portfolio to not only generate capital growth, but strong dividend income as well.

So what are the top Canadian banking ETFs?

  • RBC Canadian Bank Yield Index ETF (RBNK)
  • BMO Equal Weight Banks Index ETF (ZEB)
  • BMO Covered Call Canadian Bank ETF (ZWB)
  • CI First Asset CanBanc Income Class (CIC)
  • iShares Equal Weight Banc & Lifeco (CEW)
  • iShares Canadian Financial Monthly Income ETF (FIE)
  • iShares TSX Capped Financials Index ETF (XFN)

RBC Canadian Bank Yield Index ETF (TSE:RBNK)

The RBC Canadian Bank Yield Index ETF (TSE:RBNK) is a Canadian bank ETF from RBC that aims to track the Solactive Canada Bank Yield Index.

Compared to our next option in ZEB, RBNK is not equally weighted. In fact, the bank ETF aims to provide enhanced dividend yield for investors and as a result, currently two of the highest yielding Canadian bank stocks in Bank of Nova Scotia and Canadian Imperial Bank of Commerce are the  largest holdings.

Much like the other pure bank ETFs on this list, this fund has only 6 holdings, the Big 5 and National Bank. Of note, despite National Bank being one of the best performing banks here in Canada, it has the second-lowest allocation in this fund. This is likely due to its outperformance and thus lower yield. As we mentioned, this fund aims to increase income.

The fund currently has a distribution of 2.96% and has turned out 11.81% annualized returns since its inception in 2017. To put this into perspective, a $10,000 investment in RBNK would be worth around $17,500 at the time of writing.

Overall, the performance of this fund versus something like ZEB is negligible. With fees of 0.33%, this used to be one of the cheaper Canadian Bank ETFs, but is now one of the more expensive as some others have actually cut fees.

With assets under management of $287 million, it's one of the smaller and unknown bank ETFs on this list as well, but has plenty of liquidity for Canadian investors looking for instant exposure to Canada's 6 best banks.

BMO Equal Weight Banks Index ETF (TSE:ZEB)

The BMO Equal Weight Banks Index ETF (TSX:ZEB) aims to track the 6 largest financial institutions here in Canada. In fact, 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 all of the same holdings as the index, along with the same proportions of each holding.

At the time of writing, its top holdings are Toronto Dominion Bank and the 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. It's largest holding currently sits at around a 18% allocation while its smallest is 15.5%. 

The ETF pays a 3%~ distribution at the time of writing. Over the last decade, the ETF has returned over 225% to investors who chose to buy it and reinvest the dividends. This works out to be around a 12.52% annualized return.

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 to not recommend Canadians buy it. It was simply too high considering it had only 6 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 that are 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 key difference is the fact 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, and 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) that 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, and ultimately 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, and someone who is 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, and this is why you'll see ZWB underperforming when compared to ZEB.

However, for those not looking to maximize total returns and instead just want the highest income possible, the fund has a much higher distribution in the mid 5% range.

ZWB is not a poor banking ETF, it is just critical that you 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're looking for overall returns, you may want to head towards ZEB.

With the bank ETF utilizing a covered call strategy, there is obviously more work involved to manage the fund. And as such, expenses are much higher compared to ZEB at 0.72%.

CI First Asset CanBanc Income Class (TSE:CIC)

Much like ZWB, CI First Asset CanBanc Income Class (TSX:CIC) aims to track the returns of Canada’s major financial institutions all while generating more income through the sale of covered call options.

There are a few key differences between this bank ETF and ZWB however, so let’s go over those first. For starters, this ETF’s holdings do not contain underlying ETFs like the BMO Covered Call Canadian Bank ETF did.

The bank ETF also pays out its dividend on a quarterly basis rather than monthly and allocates a maximum number of shares the fund can sell call options on (25%). So, if the fund holds 1000 shares of the Royal Bank of Canada, they are restricted to selling covered calls for only 250 shares.

This ETF also uses a tighter equal weight strategy, with all of the holdings in the portfolio varying by only 0.7%. It contains anywhere from a 16.3%-17% total allocation to each of Canada's 6 banks.

First Asset's bank ETF has a MER of 0.8%, meaning you'll pay $8 per $1000 invested on an annual basis and it has a distribution in the low 5% range at the time of writing. In terms of performance, it's one of the weaker ETFs on this list with annualized returns in the high 9% range.

This is very likely due to the funds more aggressive covered call nature. It simply hasn't been able to take full advantage of the financial sector's bull run. So for CIC to outperform, it might need the banks to lag over the next few years.

iShares Equal Weight Banc & Lifeco (TSE:CEW)

The iShares Equal Weight Banc & Lifeco ETF takes a unique spin on the financial sector. Not only does it hold equal weight positions in all of Canada's Big 6 banks, but it also contains some of the most popular life insurance companies in the country.

The fund has assets under management of $243M and in terms of 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 weight, the allocations in this ETF are pretty simple. It contains 10 stocks and aims to keep a 10% weighting on each.

Obviously, 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 simply rebalance when needed.

At the time of writing the fund yields just under 3% and has management fees of 0.61%, meaning you'll pay $6.10 per $1000 invested on an annual basis. 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 completely up to the individual investor.

The fund aims to pay distributions on a monthly basis of $0.04167 per unit. In this type of situation, if the fund fails to meet obligations on that front it may start to pay out return of capital and capital gains. 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 provides a pretty unique product for Canadians looking to not only get exposure to the big Canadian banks, but to the entire financial sector via not only common stocks but preferred shares and bonds.

At the time of writing, one-third of this fund is made up of bonds and preferred shares. So you might ask, why are we including it on a top Canadian bank ETF list then? Well, that's because a decent chunk of the corporate bonds and preferred shares inside of this portfolio are from the big banks.

The fund has assets under management of just over $950M, making this one of the larger funds on the list, and in terms of the common stock portion of the portfolio, its top 5 holdings include ever major bank here in North America besides the Bank of Nova Scotia, which sits just outside 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 of these types of securities are often not as volatile as common stocks.

The fund has the highest management expense ratio on this list at 0.89%. However, it also has the highest yield on this list in the high 5% range, so some may find the excess fees worth it.

Just make note that in terms of overall performance, this fund has struggled. At least when we compare it to the others on the list. Despite yielding nearly 6%, it has managed to only carve out 8.3% annualized returns since its 2011 inception. 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 that focuses exclusively on Canada's banks, but it's a fund I felt needed to be included nonetheless because it still has very strong exposure. The fund tracks the S&P/TSX Capped Financials Index, which is made up of Canadian corporations that operate in the financial sector.

Due to its broad exposure to the financial sector, Canada's Big 5 make up a large portion of this fund. In fact, the top 3 holdings which are Royal Bank, Toronto-Dominion Bank, and Bank of Nova Scotia make up half of the fund's assets. The Bank of Montreal 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, and is the only Big 6 bank that has a sub 4% weighting inside of this portfolio. It does contain some exposure to lower-yielding insurers and asset managers like Brookfield Asset Management, so it does only yield in the mid 2% range at the time of writing.

However, this fund has outstanding past performance, carving out a 11.7% annualized return over a 10-year timeframe. If you had invested $10,000 into XFN and reinvested the dividends a decade ago, you'd be sitting on total returns in excess of $30,000.

Fees come in at $6.10 per $1000 invested. So although it's not the cheapest fund, it's not the most expensive either. And for its part, it has managed to produce one of the best returns out of any fund on this list as well.

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

In terms of funds like ZEB and CEW, the equal-weighted nature of them 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 stream of passive income.

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

Disclaimer: The writer of this article or employees of Stocktrades Ltd may have positions in securities listed in this article. Stocktrades Ltd may also be compensated via affiliate links in this post.

Dan Kent

About the author

An active dividend and growth investor, Dan has been involved with the website since its inception. He is primarily a researcher and writer here at Stocktrades.ca, and his pieces have numerous mentions on the Globe and Mail, Forbes, Winnipeg Free Press, and other high authority financial websites. He has become an authority figure in the Canadian finance niche, primarily due to his attention to detail and overall dedication to achieving the highest returns on his investments. Investing on his own since he was 19 years old, Dan has compiled the experience and knowledge needed to be successful in the world of self-directed investing, and is always happy to bring that knowledge to Stocktrades.ca readers and any other publications that give him the opportunity to write. He has completed the Canadian Securities Course, manages his TFSA, RRSPs and a LIRA at Qtrade, and has compiled a real estate portfolio of his primary residence and 2 rental properties, all before his 30th birthday.