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Canadian Bank ETF’s You Need to Look at in May 2021

Posted in on May 14, 2021 by Dan Kent

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

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 banks stock prices were back to pre-crash prices within a year or two.

In terms of COVID-19, because interest rates have fallen drastically, there is more to be concerned about now. However, although the Canadian banks are lagging the overall market in terms of recovery (besides a select few), they’re recovering just fine and most importantly, the dividends have stayed in tact.

As such, 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.

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 in 2020 as gold has soared.

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.

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.

And, our final 2 bank ETFs provide a unique spin in the form of covered calls to accelerate your returns and provide higher distributions. And because they are actively managed this way, we can expect higher fees. As long as those higher fees translate into better results (which they have) we’re OK with it.

Just keep in mind, that you’ll be paying at minimum $5.50 a year per $1000 invested for these ETFs.

Canada’s Best Bank ETFs

BMO Equal Weight Banks Index ETF (TSX:ZEB)

wdt_ID Stock % Assets
1 Bank of Nova Scotia (BNS) 18.59
2 Bank of Montreal (BMO) 17.58
3 Toronto Dominion Bank (TD) 17.28
4 CIBC (CM) 16.04
5 Royal Bank of Canada (RY) 15.85
6 National Bank of Canada (NA) 14.47

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.

The ETF pays a yield of 4.03% at the time of writing. Created in 2010, this Canadian bank ETF has returned 9.84% annually since inception.

If you’re looking for the simplest, most direct way to invest in Canada’s banks, then this bank ETF is for you. However, there are a few downsides.

For one, its management fee. The ETF currently has an expense ratio of 0.61%. While this is still relatively low, we must take into consideration that the fund is only managing 6 holdings.

An individual investor could replicate these positions for as little as $30 in commission on a brokerage like Questrade.

Secondly, an equal weighted investment in all of the holdings within this portfolio would produce an average yield of around 4.46% at the time of writing. With this Canadian bank ETF, your yield is 4.03%. This is a pretty significant cut to your yield.

So, although this is a good option for investors who want absolutely nothing to do with individual stock picks, the fees and lower dividends can be quickly avoided by simply purchasing the 6 stocks in the ETF.

5 year dividend adjusted performance of ZEB vs the TSX


BMO Covered Call Canadian Banks (TSX:ZWB)

wdt_ID Stock % Assets
1 BMO Equal Weight Banks ETF 27.43
2 Bank of Nova Scotia (BNS) 13.49
3 Bank of Montreal (BMO) 12.75
4 Toronto Dominion Bank (TD) 12.53
5 CIBC (CM) 11.63
6 Royal Bank of Canada (RY) 11.50
7 National Bank (NA) 10.49
107 Variety of covered call options

Canadian investors that are looking for a bank ETF that pays a lucrative dividend, look no further than the BMO Covered Call Canadian Bank ETF (TSX:ZWB).

This ETF invests in the same holdings as our previous ETF ZEB. In fact, ZWB actually holds ZEB in addition to holding the banks outright. It accounts for around 27.4% of the fund.

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.

Currently the bank ETF pays around 5.66% in dividends on a monthly basis and has some fairly strong returns. The fund opened in January 2011, so its ten year return and return since inception are almost the same at 7.81% and 7.84% respectively.

You’ll notice that is lower than the return for ZEB. Because you have an obligation to sell your shares if a stock reaches the price of your call option, your upside is limited. You collect your premium, but if the stock goes up by a lot, you don’t participate in the whole price movement.

This means in a rising market like we’ve had for the last ten years, you are likely to underperform even after collecting the extra income.

With the bank ETF utilizing covered calls, there is obviously more work involved to manage the fund. And as such, the management fee is higher compared to ZEB at 0.71%.

5 year dividend adjusted performance of ZWB vs the TSX


CI First Asset CanBanc Income Class ETF (TSX:CIC)

wdt_ID Stock % Assets
1 Toronto Dominion Bank (TD) 16.86
2 Bank of Nova Scotia (BNS) 16.78
3 Royal Bank of Canada (RY) 16.43
4 CIBC (CM) 16.39
5 National Bank of Canada (NA) 16.37
6 Bank of Montreal (BMO) 16.32

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 Royal Bank, they are restricted to selling covered calls for only 250 shares.

The ETF pays a yield of 9.5% and had an annual return of 7.61% over the last ten years. The ETF’s fee is 0.65%.

5 year dividend adjusted performance of CIC vs the TSX


So, which Canadian bank ETF is right for you?

The 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 ZEB, like we mentioned, there are a few downsides.

Individual purchases with equal weighting among all the holdings within the ETF would have you yielding just over 0.40% more, and would take very little time to balance. In the end, the ETF will end up costing you $5.50 in management fees per $1000 invested, along with a loss in dividends of $4 annually a year compared to owning the stocks outright.

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.