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

Posted on September 24, 2021 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 banks stock prices were back to pre-crash prices within a year or two.

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.

Banks loan money. As such, rising interest rates are a huge positive for bank stocks. With the economy continuing to recover, we will likely see rates rise in early to mid 2022, a positive sign for financial companies.

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.

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.

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.

So what are the best Canadian bank ETFs?

RBC Canadian Bank Yield Index ETF (TSE:RBNK)

wdt_ID Stock % Assets
1 Bank of Nova Scotia (BNS) 24.8
2 Canadian Imperial Bank of Commerce (CM) 24.8
3 Bank of Montreal (BMO) 16.79
4 Toronto Dominion Bank (TD) 16.32
5 National Bank of Canada (NA) 8.67
6 Royal Bank of Canada (RY) 8.49

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 2 highest holdings.

Much like the other 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 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.

Overall, the performance of this fund versus 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 actually cut fees.

With assets under management of $186 million, it's actually one of the smaller 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.

5 year performance of RBNK vs the TSX

TSE:RBNK vs TSX Index

BMO Equal Weight Banks Index ETF (TSX:ZEB)

wdt_ID Stock % Assets
1 CIBC (CM) 17.94
2 Bank of Montreal (BMO) 17.26
3 National Bank of Canada (NA) 16.88
4 Royal Bank of Canada (RY) 16.68
5 Toronto Dominion Bank (TD) 15.64
6 Bank of Nova Scotia (BNS) 15.12

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 3.30% distribution at the time of writing. Over the last decade, the ETF has returned over 229.9% to investors who chose to buy it and reinvest the dividends.

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.

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.

But there is  no doubt, an individual investor could replicate these positions for as little as $30 in commission on a brokerage like Questrade, or even for free on a platform like Wealthsimple Trade.

Secondly, an equal weighted investment in all of the holdings within this portfolio would produce a higher yield than the fund is providing. So, there is some sacrifice there as well.

Overall though, with $2.2B in assets under management, this is the largest and most popular fund on this list in terms of Canadian Bank ETFs, and is a strong option for Canadians.

5 year performance of ZEB vs the TSX

BMO Covered Call Canadian Banks (TSX:ZWB)

wdt_ID Stock % Assets
1 BMO Equal Weight Banks ETF 27.23
2 CIBC (CM) 13.10
3 Bank of Montreal (BMO) 12.6
4 National Bank (NA) 12.33
5 Royal Bank of Canada (RY) 12.18
6 Toronto Dominion Bank 11.42
7 Bank of Nova Scotia (BNS) 11.04
107 Variety of covered call options

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 in the chart below.

However, for those not looking to maximize total returns and instead just want the highest income possible, the fund has a much higher distribution at 5.43%.

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 the passive income, go for ZWB. If you're looking for overall returns, you may want to head towards ZEB.

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 0.72%.

5 year dividend adjusted performance of ZWB vs the TSX

CI Canadian Banks Income Class ETF (TSX:CIC)

wdt_ID Stock % Assets
1 Bank of Montreal (BMO) 17.03
2 Toronto Dominion Bank (TD) 16.71
3 CIBC (CM) 16.56
4 National Bank of Canada (NA) 16.54
5 Royal Bank of Canada (RY) 16.46
6 Bank of Nova Scotia (BNS) 16.24
106 Variety of covered call options

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.

As you'll see in the holdings above, the ETF is also more equally weighted than both ZEB and ZWB, with all of the holdings being within 0.7% of each other.

The key difference between CIC and ZWB however is the distribution. CIC pays 7.93%, which is much higher than ZWB. This is because it deploys a more aggressive covered call strategy and can afford to pay out more via its distribution.

However as you'll see in the chart below, the returns are practically the same as ZWB. So, this may come down to a decision from the individual on whether or not they want monthly or quarterly income.

The management fee is also slightly lower at 0.65%.

5 year dividend adjusted performance of CIC vs the TSX

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 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 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 annually.

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 the post below.

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 Questrade, and has compiled a real estate portfolio of his primary residence and 2 rental properties, all before his 30th birthday.