The Pure-Play Canadian Bank Monthly Income Portfolio

Look, I put together a lot of ETF portfolios like this. Some of them will outperform a plain vanilla stock and bond mix. Others will not. Many come with higher fees and lower diversification.

But someone out there is always looking for something a little different, and at the end of the day, you can decide what fits your own situation. I just like building these wacky ETF combinations and seeing how the pieces interact, for better or worse.

Today’s version is all about Canadian banks. I do not fully understand the obsession Canadian investors have for these stocks. Yes, dividends have grown over time. Yes, these institutions have been around for over a century. Yes, they enjoy the benefits of an oligopoly, much to the detriment of customers.

But if there is one sector I personally would not want to be overly concentrated in, it is financials, regardless of how strong their capital ratios look on paper. Still, if you are going to lean into Canadian banks, there is a more structured way to do it than just loading up on a single name.

This ETF portfolio is designed to generate monthly income from Canadian banks using three different approaches: leverage, covered calls, and hybrid securities.

33% Leveraged Canadian Banks

The first component is the Hamilton Enhanced Canadian Bank ETF (HCAL). It tracks an equal-weight index of the six largest Canadian banks, ensuring that no single name dominates the portfolio. What makes HCAL different is its use of leverage.

The fund can go up to 1.25 times exposure, or 125%. This is not done through swaps or daily reset leverage like trading products. It is cash borrowing, except investors are not subject to margin calls, and it is registered account eligible.

You can see this directly in the holdings. HCAL effectively owns 125% of HEB and offsets that with a negative 25% cash position. This amplifies both upside and downside.

It also modestly boosts income. The ETF currently yields 4.19% with monthly distributions. The trade-off is cost. There is a 0.65% management fee, but once borrowing costs are included, the management expense ratio rises to about 2.08%.

33% in Canadian Bank Covered Calls

Leverage is one way to enhance yield. Covered calls are another. The Global X Equal Weight Canadian Bank Covered Call ETF (BKCC) holds a similar underlying portfolio of Canadian banks but takes a different approach to generating income.

Instead of using leverage, the managers sell call options on the holdings to generate income. This is done on a discretionary basis. The managers can adjust strike prices, expiries, and how much of the portfolio is covered depending on market conditions.

The result is a different trade-off. You give up some upside potential in exchange for higher current income. That shows up clearly in the yield, which sits around 9.7% annually with monthly distributions.

Costs are also lower than the leveraged approach. The ETF charges a 0.49% management fee plus a 0.22% trading expense ratio, with no borrowing costs layered on top.

33% Hybrid Canadian Bank Securities

The final piece is the BMO Canadian Bank Income Index ETF (ZBI). This ETF still focuses on Canadian banks, but instead of holding common shares, it invests in a mix of corporate bonds, preferred shares, and limited recourse capital notes.

Most investors are familiar with bonds and preferred shares. Limited recourse capital notes, or LRCNs, are less well known. LRCNs are debt instruments that are designed to count as regulatory capital.

They typically pay a fixed coupon like a bond, but they are structured so that in extreme stress scenarios, they can absorb losses, often through conversion mechanisms tied to preferred shares. That is why they offer higher yields than traditional senior debt.

Looking at the portfolio, about 45% is in investment-grade corporate bonds, roughly 30% in LRCNs, and about 9% in preferred shares, with another 9.5% in non-viable contingent capital, which refers to securities that can be written down or converted if a bank is deemed no longer viable.

This mix places ZBI somewhere between equities and fixed income in terms of risk and return. It is also the cheapest component of the portfolio, with a 0.27% management expense ratio, and it delivers a 4.54% annualized distribution yield paid monthly.