The Motley Fool

BMO S&P/TSX Equal Weight Banks Index ETF: Why You Should Own it


Which Big Six bank stock is performing the best so far in 2016?

If you answered Bank of Nova Scotia (TSX:BNS)(NYSE:BNS), give yourself a pat on the back. It’s up 28.9% year-to-date, 810 basis points better than National Bank of Canada (TSX:NA). Pulling up the rear, and the only of the Big Six without double-digit returns is Toronto-Dominion Bank (TSX:TD)(NYSE:TX)–up 9.7%

Big Six bank stock performance: YTD through September 21, 2016

Bank YTD Return
Bank of Nova Scotia 28.9%
National Bank 20.7%
Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) 14.9%
Bank of Montreal 


Royal Bank of Canada 


TD 9.7%

Source: Morningstar

Now take a guess how the BMO S&P/TSX Equal Weight Banks Index ETF (TSX:ZEB) has performed through almost nine months of trading. It’s up 16.3%, better than all but two of the Big Six and 430 basis points higher than the S&P/TSX 60.

Knowing investors are irrational, those of you who own either Bank of Nova Scotia or National Bank directly are likely congratulating yourselves for being so smart. Unfortunately, it has more to do with the law of averages than it does with your ability to pick bank stocks.

Big Six bank stock performance: annual returns 2011-2015

2011 2012 2013 2014 2015
Bank of Nova Scotia -7.3% 17.5% 18.8% 3.7% -10.4%
National Bank 9.4% 11.5% 19.0% 16.2% -14.3%
CIBC -1.3% 13.4% 18.2% 14.5% -4.2%
Bank of Montreal 2.1% 14.0% 21.2% 20.4% -1.1%
Royal Bank 3.3% 19.6% 23.5% 16.3% -3.8%
TD 6.3% 13.6% 23.4% 14.6% 1.3%

Source: Morningstar

Bank of Nova Scotia failed to be the best performer (bold) in all five years with National Bank taking the title just once in 2011. Bank of Nova Scotia managed to be runner-up (underlined) in 2012, but that was it when it comes to second-place finishes. National Bank failed to place in all four years after it won the top prize.

About the only inference I can take from these numbers is that your chances of success were higher with Royal Bank and BMO between 2011 and 2015 than they were with any other of the Big Six banks.

You’d have to go back over the financial performance of all six banks to ascertain whether or not Royal Bank and BMO had the best financial results over this time period. As I said, I think you’ll find it was a roll of the dice rather than anything specifically tied to corporate performance.

So, if luck plays a part in a bank stock’s ultimate success or failure, why bother to play the game at all? The cards are stacked against you.

Sure, you could buy one of the other bank ETFs, such as the BMO Covered Call Canadian Banks ETF (TSX:ZWB), but its MER is 10 basis points higher than the equal-weight ETF.

And that’s a big deal for two reasons.

First, ZWB is a combination of the stocks themselves (weighted almost equally between the six) plus 41.5% invested in ZEB, which is equal weighted. It makes no sense to pay 10 basis points more to accomplish virtually the same thing.

Secondly, ZWB uses a covered-call strategy to generate premium income, which reduces the management fee but ultimately is a drag on the performance of those bank stocks. Over the past five years, ZEB delivered an annualized total return of 12.4%, 110 basis points higher than ZWB.

At the end of the day, if you’re a fan of bank stocks I see no reason why you should try to figure out which of the six is going to win each year when ZEB automatically does that for you.

Investing doesn’t need to be complicated or time-consuming. Trying to pick a winner every year is both.

The 10 Best Stocks to Buy This Month

Renowned Canadian investor Iain Butler just named 10 stocks for Canadians to buy TODAY. So if you’re tired of reading about other people getting rich in the stock market, this might be a good day for you. Because Motley Fool Canada is offering a full 65% off the list price of their top stock-picking service, plus a complete membership fee back guarantee on what you pay for the service. Simply click here to discover how you can take advantage of this.

Click Here to Learn More Today!

Fool contributor Will Ashworth has no position in any stocks mentioned.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.