The Top Canadian Bank ETFs to Buy in February 2024 and Beyond

Posted on February 17, 2024 by Dan Kent
Canadian Bank ETFs To Buy Right Now

Canadian banks are some of the best stocks in Canada and 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 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.

So what are the top Canadian banking ETFs?

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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. 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 six 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 lowest allocation in this fund.

This is likely due to its outperformance and, thus, lower yield. As we mentioned, this fund aims to generate higher dividends than its peers.

The fund currently has a distribution in the 5.5% range and has turned out 5.7% annualized returns since its inception in 2017. To put this into perspective, a $10,000 investment in RBNK would be worth around $13,700 at the time of writing.

Overall, the performance of this fund versus something like ZEB is negligible. With fees of 0.32%, this used to be one of the cheaper Canadian Bank ETFs but is now one of the more expensive as some others have cut fees.

With assets under management of $244 million, it's also one of the smaller and unknown bank ETFs on this list. Still, it has plenty of liquidity for Canadian investors looking for instant exposure to Canada's six best banks.

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 5.2%~ distribution at the time of writing. Over the last decade, the ETF has returned over 135% to investors who chose to buy it and reinvest the dividends. This is around a 9.5% 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 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 7.9% range.

Investors should note the active covered call strategy comes with a higher management fee, with the MER currently at 0.71%. 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.

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.

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.

However, this bank ETF and ZWB have a few key differences, so let's go over those first. 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 every quarter rather than monthly. It 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 0.9%. It contains anywhere from a 16.1%-17% total allocation to each of Canada's six banks.

First Asset's bank ETF has a MER of 0.8%, meaning you'll pay $8 per $1000 invested annually, and it has a distribution of approximately 8.1% 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 7% range.

This is likely due to the fund's 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, the banks might need to lag over the next few years.

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 $185M. 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 under 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.

The fund is currently paying a distribution of $0.054 per month, and 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 mid-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. Despite the 7%+ yield, it has managed to only carve out 6.5% 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 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, comprise 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 an 8.82% annualized return over a 10-year timeframe. Suppose you had invested $10,000 into XFN and reinvested the dividends a decade ago. In that case, you'd be sitting on total returns of over $23,000.

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 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 ZEB!

Regarding funds like ZEB and CEW, 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.

This is why there is a considerable 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.

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. Stocktrades Ltd will run advertisements on our posts. These advertisements do not represent an endorsement by us.

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.