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% Management Expense Ratio (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 30^th, 2023 and offers a 3.55% distribution yield as of December 19^th, 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. Continue Reading…