Posted By Here’s a look at the different ways investors can express a view on Canada’s banking sector via ETFs.
By Skye Collyer
BMO Global Asset Management
(Sponsor Blog)
The first week of December brought a flurry of earnings reports from Canada’s “Big Six” banks: Bank of Montreal (BMO), Royal Bank of Canada (RBC), Toronto-Dominion Bank (TD), Scotiabank (BNS), Canadian Imperial Bank of Commerce (CIBC), and National Bank of Canada (NA).
The best way to describe the results? A “mixed bag.” For example, BMO missed earnings expectations and increased provisions for potential loan losses.
Meanwhile, CIBC reported a jump in Q4 profits year-over-year and raised its dividend, a move mirrored by NA and RBC. BNS posted a rise in Q4 profits but warned of headwinds from a slowing economy and decelerating loan growth.
The biggest disappointment came from TD, which fell 7% intraday after adjusted earnings took a hit from penalties tied to anti-money laundering violations in the U.S. and a cap on asset growth for its U.S. retail banking business1.
What’s the takeaway for investors? Short-term fortunes can vary dramatically among the Big Six, so unless you have expertise in this space and the time to stay on top of developments, stock picking might not be ideal.
Historically, Canadian banks as a group have delivered strong earnings and dividend growth, making them a more reliable bet for long-term investors.
Instead of zeroing in on individual names, you might consider investing in the entire industry through ETFs. Here are three ETF options, catering to different risk profiles2 and objectives.
BMO Equal Weight Banks Index ETF (ZEB)
The flagship ETF for investors looking to express a neutral, bullish view on Canada’s banks — without worrying about which one will outperform — is the BMO Equal Weight Banks Index ETF (ZEB).
This ETF is a heavyweight in the space, with just shy of $4 billion in assets under management as of December 19, 2024, and it has been a staple for Canadian bank investors since its launch in October 20093.
It tracks the performance of the Solactive Equal Weight Canada Banks Index, which — as the name suggests — gives equal weight to all six banks regardless of their size. This approach is rebalanced periodically, introducing a natural “buy low, sell high” mechanic.
ZEB charges a 0.28% MER and currently pays a 4.00% distribution yield4. What’s particularly attractive for income-focused investors is the monthly distribution schedule, compared to the quarterly payouts of individual bank stocks.
BMO Covered Call Canadian Banks ETF (ZWB)
If you’re seeking higher cash flow and don’t mind capping some potential share price appreciation, the BMO Covered Call Canadian Banks ETF (ZWB) could be an appealing alternative to ZEB.
ZWB holds the exact same six Canadian bank stocks as ZEB and is also well-capitalized, with $3.2 billion in assets under management as of Dec 19, 20245. However, it boasts a higher 6.67% distribution yield as of Dec 19, 2024. How does it achieve this? By employing a covered call strategy. Here’s how it works:
ZWB sells call options on the bank stocks it holds and receives premiums , which generate additional yield for the fund (with premiums taxed favourably at the capital gains rate).
In exchange, ZWB agrees to sell a stock at a set price (the strike price) if the stock’s market price exceeds that level by the option’s expiration. This caps the upside price appreciation of the shares over and above the selected strike price.
However, if the stocks stay flat or decline, ZWB keeps the premium and the underlying shares, adding a layer of enhanced yield while providing a volatility cushion.
While this strategy increases cash flow, it does come with trade-offs. Investors sacrifice some of their potential price gains for enhanced monthly cash flow. The fund charges a 0.71% MER as of June 30, 2023, reflecting the costs associated with managing the options. Read more about our covered call ETF methodology here.
BMO Canadian Bank Income Index ETF (ZBI)
Stocks aren’t the only way to invest in Canada’s banking sector. Banks also issue a variety of securities such as corporate bonds, preferred shares, and limited recourse capital notes (LRCNs).
LRCNs are hybrid securities that function like bonds but are designed to absorb losses in extreme scenarios, providing a layer of stability for the issuing bank.
These instruments often provide returns that are less correlated with bank stocks and typically come with lower volatility. However, accessing them as a retail investor can be challenging. That’s where the BMO Canadian Bank Income Index ETF (ZBI) comes in.
ZBI offers a convenient way to gain exposure to all these securities in a single ETF. As of Dec. 12, its portfolio is diversified as follows: 53.46% in corporate bonds, 26.61% in limited recourse capital notes, 10.83% in preferred stock, and 9.10% in non-viable contingent capital securities7.
Rated as low risk*, ZBI charges a 0.28% MER as of June 30th, 2023 and offers a 3.55% distribution yield as of December 19th, with monthly payouts. It’s an excellent way to complement common bank stocks with quasi-fixed-income exposure.
Want more insights on Canadian bank earnings?
Listen to our deep dive into the fourth quarter earnings from Canada’s Big Six, breaking down recent results and examining key economic variables. Listen here.
1 https://www.moneysense.ca/save/investing/stocks/canadian-banks-earnings-reports/
2 Risk Profile – Comprised of a client’s risk tolerance (i.e. client’s willingness to accept risk) and risk capacity (i.e. a client’s ability to endure potential financial loss)
3 https://www.bmogam.com/ca-en/products/exchange-traded-fund/bmo-equal-weight-banks-index-etf-zeb/
4 Management Expense Ratios (MERs) as of June 30, 2023. Annualized distribution yield as of Dec 19, 2024.
5 https://www.bmogam.com/ca-en/products/exchange-traded-fund/bmo-covered-call-canadian-banks-etf-zwb/
6 Call options are a financial derivative that gives its owner the right to buy a specified security at a set price within a certain period. https://www.investopedia.com/terms/c/calloption.asp
Option premium is the current market price of an option contract https://www.investopedia.com/terms/o/option-premium.asp
Strike price is known as the options exercise price. Long options contracts are derivatives that give the holders the right but not the obligation to buy or sell an underlying security at some point in the future at a pre-specified price. This price is known as the option’s strike price or exercise price. https://www.investopedia.com/terms/s/strikeprice.asp
Volatility is a statistical measure of returns for a given security or market index. https://www.investopedia.com/terms/v/volatility.asp
7 https://www.bmogam.com/ca-en/products/exchange-traded-fund/bmo-canadian-bank-income-index-etf-zbi/ The portfolio holdings are subject to change without notice and only represent a small percentage of portfolio holdings. They are not recommendations to buy or sell any particular security.
Annualized distribution yield is calculated by taking the most recent regular distribution, or expected distribution, (excluding additional year end distributions) annualized for frequency, divided by current NAV. The yield calculation does not include reinvested distributions.
Performance Data (as of November 30, 2024):
| Fund | YTD | 1-Year | 2-Year | 3-Year | 5-Year | 10-Year | Since Inception | Inception date |
| ZEB – BMO Equal Weight Banks Index ETF | 26.02% | 39.76% | 14.48% | 9.68% | 11.92% | 9.89% | 11.25% | Oct 20, 2009 |
| ZWB – BMO Covered Call Canadian Banks ETF | 20.59% | 29.66% | 10.08% | 6.31% | 8.22% | 7.554% | 8.72% | Jan 28, 2011 |
| ZBI – BMO Canadian Bank Income Index ETF | 11.27% | 13.59% | 9.10% | 3.61% | Feb 7, 2022 |
Skye Collyer is Director, ETF Distribution Western Canada for BMO Global Asset Management. With more than 15 years of financial services experience, including roles at retail full-service brokerages and in asset management, Skye has a refined consultative, client-first approach when working with Portfolio Managers and investment Advisors. Prior to joining BMO Global Asset Management, she held various sales and business development positions at Global X, AlphaNorth Asset Management, and Norrep Capital Management Ltd. Skye has also served as a Senior Consultant in client services for several financial, technology, and media outlets — including on-air coverage for BNN Bloomberg. She holds an MBA from the UBC Sauder School of Business in British Columbia and has completed a Global Network of Advanced Management program from the Yale School of Management in New Haven, Connecticut.
Disclaimers *All investments involve risk. The value of an ETF can go down as well as up and you could lose money. The risk of an ETF is rated based on the volatility of the ETF’s returns using the standardized risk classification methodology mandated by the Canadian Securities Administrators. Historical volatility doesn’t tell you how volatile an ETF will be in the future. An ETF with a risk rating of “low” can still lose money. For more information about the risk rating and specific risks that can affect an ETF’s returns, see the BMO ETFs’ prospectus. This article is for information purposes only. The information contained herein is not, and should not be construed as investment, tax or legal advice to any party. Particular investments and/or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance. The viewpoints expressed by the author represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent prospectus. Distribution yields are calculated by using the most recent regular distribution, or expected distribution, (which may be based on income, dividends, return of capital, and option premiums, as applicable) and excluding additional year end distributions, and special reinvested distributions annualized for frequency, divided by current net asset value (NAV). The yield calculation does not include reinvested distributions. Distributions are not guaranteed, may fluctuate and are subject to change and/or elimination. Distribution rates may change without notice (up or down) depending on market conditions and NAV fluctuations. The payment of distributions should not be confused with the BMO ETF’s performance, rate of return or yield. 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Certain BMO ETFs have adopted a distribution reinvestment plan, which provides that a unitholder may elect to automatically reinvest all cash distributions paid on units held by that unitholder in additional units of the applicable BMO ETF in accordance with the terms of the distribution reinvestment plan. For further information, see the distribution policy in the BMO ETFs’ prospectus. Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the ETF Facts or prospectus of the BMO ETFs before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated. For a summary of the risks of an investment in the BMO ETFs, please see the specific risks set out in the BMO ETF’s prospectus. BMO ETFs trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination. BMO ETFs are managed by BMO Asset Management Inc., which is an investment fund manager and a portfolio manager, and a separate legal entity from Bank of Montreal. BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate. “BMO (M-bar roundel symbol)” is a registered trademark of Bank of Montreal, used under licence. December 2024
