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“Best Buys Now” Pick #1:

Hamilton Enhanced Canadian Bank ETF (TSX:HCAL)

The Single Best Way to Invest in Bank Stocks

The implosion of Silicon Valley Bank (SVB), and others, sent shockwaves through the banking industry, and the “Big Six” Canadian banks were not spared. SVB went down a third of the way through March. The average performance for the Big Six was a 10.6% drop from the start of March to their respective bottoms (between March 13 and March 24). All have since recovered somewhat, but stock prices across the group remain depressed.

Step back and understand, Fools: We’ve seen such fear before. During the 2008 Global Financial Crisis, with world banks failing right and left, the Big Six were pummeled alongside everyone else. For example, at its nadir, Bank of Montreal (TSX:BMO) had fallen so far that its dividend yield exceeded 11%! If you’d bought on that day, you’d have made a 17% annual return (assuming reinvestment of dividends) — a number that has simply smashed the annualized market return of 10.5% (as measured by the TSX Total Return Index). The others have also all outpaced the broader market by between two and 6.4 percentage points annually.

Bold statement: we’re of the mind that this isn’t the Global Financial Crisis Part II.

For starters, during 2008/2009, when the financial system was at risk of collapse, that was a crisis brought on by credit-quality concerns. The industry concerns today simply aren’t the same.  Rather, today, it’s fear that certain banks, SVB among them, locked in excellent-quality, long-term assets, paying them far too little attention at a time when cost of liabilities is soaring due to rate hikes.

Then realize that this is mostly a problem at smaller and regional U.S. banks — not at the systemically “too-big-to-fail” (TBTF) institutions. I’d argue that the Big Six in Canada are all TBTF, and that the long-term progression of the U.S. banking system is arguably towards the form that industry has here in this country (i.e., a small handful of TBTF institutions).

Plus, the banks in Canada are so large and so diverse in service offerings (traditional banking, mortgages, insurance, wealth management, investment banking, specialty asset financing, et cetera, ad nauseam), so heavily regulated, and so important to the fabric of the country (the government literally brought in a special incremental tax on deemed “windfall profits” last year to help finance their spending plans) that I am confident that this too shall pass.

In summary, I don’t think the Canadian banks are going anywhere. They’re earnings and dividend/cash flow machines, and they’re all priced very reasonably (arguably even cheaply) right now.

And now for an easy way to buy all of them:

Hamilton Enhanced Canadian Bank ETF (TSX:HCAL) is an exchange-traded fund that provides a one-stop solution for investing in all the big Canadian banks. The fund aims to perform even better than the banks in aggregate by using 25% leverage to goose its returns. That leverage was presumably getting more expensive with every interest rate hike, but those hikes are now on pause, meaning that HCAL’s cost increases too will be “on pause.”

HCAL presently yields 7.6%, paying $0.127 monthly: a number I think will be ultimately seen to be defensible and likely to grow in the future. When we consider the potential for bank multiples to normalize, there’s a very attractive total return package on offer.

“Best Buys Now” Pick #2


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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 Jim Gillies has positions in Hamilton Enhanced Canadian Bank ETF. The Motley Fool recommends Hamilton Enhanced Canadian Bank ETF. The Motley Fool has a disclosure policy.

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