If I had $1,000 to invest in a Canadian bank exchange-traded fund (ETF) and hold it forever, iShares S&P/TSX Capped Financials Index ETF (TSX:XFN) would be my top choice right now. The ETF offers diversified exposure to Canada’s largest banks and financial institutions, combining steady growth with reliable dividends. While individual bank stocks can be appealing, an ETF like XFN spreads risk across multiple companies, ensuring that no single bank’s troubles can sink your investment. So, let’s get into it.
Image source: Getty Images
About XFN
XFN tracks the S&P/TSX Capped Financials Index, focusing solely on Canada’s financial sector. As of writing, the ETF trades at around $60.60 per share, reflecting a solid 25.52% increase over the past year. This growth highlights the resilience of Canada’s financial sector, even in the face of economic uncertainty. It’s easy to see why long-term investors are drawn to XFN. It provides exposure to a sector known for its stability, consistent dividends, and market leadership.
The ETF’s largest holdings are Canada’s most prominent financial institutions. This diversified mix ensures that your investment isn’t overly reliant on the performance of a single bank. Even if one institution faces challenges, the strength of the others helps balance the overall performance of the ETF. Moreover, The ETF’s management fee is 0.55%, which is relatively low given the breadth of exposure it offers. While some ETFs have even lower fees, XFN’s focus on high-quality, dividend-paying Canadian financials makes the cost worthwhile.
From a valuation perspective, XFN appears reasonably priced, with a price-to-earnings ratio of 12.37 and a price-to-book ratio of 1.59. These figures suggest the ETF is trading at fair value, providing both growth potential and stability. This balance is particularly attractive for long-term investors who want exposure to the financial sector without taking on excessive risk.
Future in focus
Dividends are another reason why XFN stands out. The ETF currently offers an annual dividend of $1.84 per share, translating to a yield of 3.01%. Dividends are distributed quarterly, with this consistent payout reflecting the strong earnings of the underlying financial institutions. Unlike some high-yield investments that come with significant risk, XFN’s dividends are backed by Canada’s most established and profitable companies.
Looking ahead, the Canadian financial sector appears well-positioned for continued growth. Economic indicators remain stable, and the country’s largest banks maintain strong capital positions, allowing the ability to weather potential downturns. Canada’s financial institutions are also investing heavily in technology and innovation, which should drive further efficiencies and profitability in the years to come. This forward-looking approach ensures that XFN investors are not just buying into past performance but are also poised to benefit from future growth.
One of XFN’s strengths lies in its inclusion of insurance companies and asset managers alongside the major banks. This added diversification within the financial sector helps reduce risk while maintaining exposure to a range of profitable business models. While banks generate revenue primarily from lending and capital markets, insurance companies benefit from premiums and investment income, creating a more balanced investment profile.
Bottom line
XFN’s performance history further reinforces its appeal. Over the past decade, the ETF has delivered consistent returns, reflecting the steady growth of Canada’s financial sector. While short-term volatility is always a possibility, XFN’s diversified approach helps smooth out the bumps, making it a reliable choice for long-term investors.
Ultimately, investing in XFN with $1,000 and holding it forever is about more than just chasing returns. It’s about building a stable foundation for your portfolio, generating consistent income, and benefiting from the long-term strength of Canada’s financial sector. Individual bank stocks can be tempting. Yet the diversification, dividends, and long-term growth potential of XFN make it a smarter choice for those looking to invest with confidence and peace of mind.
