Toronto-Dominion Bank’s (TSX:TD) Returns Are No Match for This ETF

Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is a great Canadian bank stock to invest in, but is it the best option on the TSX?

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Bank stocks can often provide investors with a lot of safety and stability over the years. However, they aren’t all created equal, and geography plays a big part in that.

Canadian bank stocks, for instance, can sometimes leave investors wanting more. And while there are good ones on there, the big question is whether or not investing in U.S. bank stocks might be a better path for investors.

Toronto-Dominion Bank (TSX:TD)(NYSE:TD) stock is one of the best bank stocks you can invest in, at least in this country. Over the past five years, TD has generated returns of 50% for investors, and that’s on top of a strong, growing dividend.

The bank has achieved significant growth in recent quarters and has been able to take advantage of growing economies in both Canada and the U.S. with interest rates rising on both sides.

Recently, however, things have started to slow down and TD’s stock has fallen 9% over the past three months. A struggling oil and gas industry along with high debt levels make Canada a risky investment these days, and so it may not be a big surprise that the TSX has struggled and the Canadian markets as a whole have been down.

If you’re buying a bank stock you’re also placing a bet on the underlying economy, and right now, Canada isn’t one that I’d be very comfortable with, and that makes TD a bit of a risky buy today.

A more appealing option might be investing in U.S. bank stocks. And while there aren’t any that you can invest in directly on the TSX, Canadian investors can buy the BMO Equal Weight US Banks ETF (TSX:ZBK), which will give you access to some top U.S. bank stocks.

The ETF offers an easy way for your portfolio to diversify with what might be a more appealing market. While TD has outperformed the ETF recently, year-to-date returns for the fund have been stronger, and over five years it has risen by more than 80%.

With big names like Wells Fargo & Co along with JPMorgan Chase & Co. in its portfolio, the ETF will provide investors with a lot of the benefits of owning a good mix of bank stocks.

However, with each stock taking up less than 6% of the total portfolio’s holdings, investors won’t be overly exposed to one individual stock the way they would otherwise be investing in just one bank.

The ETF charges a management expense ratio of only 0.39%, ensuring that portfolio-related fees won’t chip away at your returns the way they might in other funds.

Bottom line

Even if you’ve decided which industry you want to invest in, there are many options that level that can make a big impact on your overall returns. The country that the stock is in is a big one, as better laws and tax treatment can result in greater profits.

Under the current U.S. administration, we’ve seen rules be a bit laxer on big banks. Under such conditions, investing in U.S. bank stocks clearly offers a big advantage over Canadian bank stocks in both the short and long term.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor David Jagielski has no position in any of the stocks mentioned.

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