How to Invest in the "Big Six" Canadian Bank Stocks via ETFs

Investing in Canada's banking sector is a popular strategy among Canadian investors, and for good reasons. Familiarity with the market, tax efficiency, and often lower costs at local brokerages make this an attractive option.

Among the most favored holdings are the "Big Six" Canadian banks: Royal Bank of Canada (RBC), Toronto-Dominion Bank (TD), Scotiabank (BNS), Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CIBC), and National Bank of Canada.

Investors are drawn to these banks for their above-average yields, long history of consistent payouts and dividend growth, a regulatory environment that favors stability, and their demonstrated resilience during the 2008 financial crisis.

Recognizing this interest, ETF issuers have responded by offering a variety of funds that specifically target these institutions. Here, we'll focus on the ETFs that provide plain vanilla, long-only exposure to Canada's "Big Six" banks.

Note: We're not going to explore the "enhanced" ETFs in this space—that is, those offering big bank exposure with added elements like leverage, swaps, inverse exposure, or options such as covered calls. That's a topic for another day.

BMO Equal Weight Banks Index ETF (ZEB)

ZEB is one of the oldest and largest ETFs in its niche, boasting an impressive $3.3 billion in assets under management since its inception in October 2009.

True to its name, ZEB holds all six of Canada's big banks in equal proportions, rebalancing regularly to maintain this balance through the Solactive Equal Weight Canada Banks Index.

One of the key benefits of ZEB over holding individual bank stocks is its monthly distributions, offering a yield of 4.54% as of July 31. While the management expense ratio (MER) of 0.28% isn't the lowest on the market, it's reasonably priced, especially considering BMO has actively reduced this fee over time.

ZEB continues to enjoy widespread popularity among investors, likely due to the strong reputation of BMO's ETF offerings and many investors' preference to stick with the fund, possibly influenced by significant unrealized capital gains.

Global X Equal Weight Canadian Banks Index ETF (HBNK)

One of the main criticisms of ZEB on platforms like Reddit was that some investors didn't see the value in paying a 0.28% MER annually when theoretically, they could buy all six banks in equal weight themselves and save on the fee, especially with commission-free brokerages like WealthSimple available.

Addressing this feedback, Global X ETFs Canada (formerly Horizons ETFs) launched HBNK in July 2023. HBNK has since amassed $834 million in assets under management. Like ZEB, HBNK tracks the Solactive Equal Weight Canada Banks Index, but it does so at significantly lower costs.

The management fee is only 0.09%, and remarkably, the MER has been rebated down to 0%—effectively making it free to invest in, aside from the bid-ask spread, as long as the waiver is in place.

HBNK also offers monthly distributions, currently yielding 4.63%, with the record date and ex-dividend date typically falling on the last business day of the month.

Hamilton Canadian Bank Equal-Weight Index ETF (HEB)

Hamilton ETFs, best known for their income-focused ETFs like the covered call YIELD MAXIMIZER lineup, also have a deep history as financial sector specialists.

It's no surprise, then, that they offer a Canadian bank ETF—HEB—which, like its counterparts, tracks the Solactive Equal Weight Canada Banks Index. Although HEB's MER of 0.25% isn't as low as HBNK's, it's still more affordable than ZEB's 0.28%. HEB provides a yield of 4.79% with monthly distributions.

Additionally, HEB plays a pivotal role in another Hamilton product, the Hamilton Enhanced Canadian Bank ETF (HCAL), which is essentially a 1.25x leveraged portfolio of all six equal-weighted bank stocks.

Hamilton Canadian Bank Mean Reversion Index ETF (HCA)

If you're looking to go beyond merely equal weighting the six major Canadian banks, the HCA offers a strategic approach. This ETF employs a systematic mean reversion strategy that aims to capitalize on the cyclical nature of bank performances.

Every quarter, HCA rebalances 80% of its portfolio towards the three worst-performing banks from the previous period and allocates the remaining 20% to the three best performers. This strategy is based on the idea of "buying low and selling high," systematically adjusting holdings to exploit potential price recoveries.

Historically, this approach has proven effective; the Solactive Canadian Bank Mean Reversion Index, which HCA tracks, has outperformed the Solactive Equal Weight Canada Banks Index.

Not only has the strategy been successful in terms of capital gains, but it also offers a higher distribution yield. Currently, HCA boasts a yield of 5.37%, capturing greater exposure to banks with depressed prices, which typically offer higher dividend yields. However, it's important to note that HCA comes with a higher MER of 0.55%.

TD Canadian Bank Dividend Index ETF (TBNK)

Another strategy for Canadian bank investors is to focus on banks that have demonstrated above-average dividend growth compared to their peers. A suitable ETF for this approach is TBNK, which tracks the Solactive Canadian Bank Dividend Index for a 0.28% MER, the same as ZEB.

TBNK employs a rules-based weighting methodology that ranks and weights its constituents based on their dividend growth over the trailing 12-month period on an annual basis.

This approach ensures that the ETF is overweight in banks that are not just stable dividend payers but are also increasing their dividends at a higher rate.

RBC Canadian Bank Yield Index ETF (RBNK)

Finally, we have RBNK, which takes a different approach compared to TBNK. Instead of overweighting banks with higher dividend growth, RBNK targets banks that offer higher dividend yields.

RBNK tracks the Solactive Canada Bank Yield TR Index, where "TR" stands for total return, indicating that the index includes dividends reinvested.

The methodology behind this ETF involves weighting its components based on their indicated dividend yield. This means that banks offering higher dividends relative to their share price are given greater weight in the ETF's portfolio, aiming to enhance the overall yield of the fund.

With a MER of 0.32%, RBNK is on the higher end of the cost spectrum among its peers. Generally, specialized indexes such as this tend to incur higher costs, which is reflected in the slightly elevated MER.