A Canadian Bank ETF I’d Buy With $1,000 and Hold Forever

This Canadian bank ETF employs light leverage to boost returns and yield, at the cost of higher fees and risk.

Key Points
  • HCAL equal-weights the Big Six banks, enforcing a disciplined buy-low, sell-high rebalance.
  • The 1.25x leverage boosts both income, resulting in a higher 4.27% annualized dividend yield paid on a monthly basis.
  • HCAL's use of light leverage also increases volatility and fees, making it best for higher risk tolerance investors.

Canada’s stock market is heavily dominated by financials, and among them, the Big Six banks. For decades, they’ve been core holdings for Canadian investors thanks to steady earnings, an oligopolistic market structure, and a long, largely uninterrupted history of dividend growth. On top of that, their payouts qualify as eligible dividends, which receive favourable tax treatment in non-registered accounts.

You could go out and buy all six banks individually. Plenty of investors do. But if you’d rather outsource the weighting, rebalancing, and administration, there’s no shortage of exchange-traded funds (ETFs) that package them together.

There’s a lot of variety in this space, but the one I keep coming back to is the Hamilton Enhanced Canadian Bank ETF (TSX: HCAL). Here’s why I think this Canadian bank ETF stands above the rest.

ETF is short for exchange traded fund, a popular investment choice for Canadians

Source: Getty Images

Equal weight and systematic discipline

HCAL tracks an equal-weight index of the Big Six Canadian banks. That means each bank receives roughly the same allocation at rebalance, instead of letting the largest banks dominate the portfolio.

In a market-cap-weighted ETF, the biggest banks automatically get the biggest weights. If one becomes overvalued relative to the others, it continues to grow in size within the fund. Equal weighting forces a disciplined rebalance. When a bank outperforms and becomes overweight, the ETF trims it. When another underperforms, it adds to it.

In effect, that creates a systematic buy-low, sell-high mechanism built into the structure. You don’t have to guess which bank will lead next. You own them all in equal proportion and let the process work over time. For long-term investors who believe in the strength of Canada’s banking system but don’t want to pick favourites, that structure is appealing.

1.25x leverage and enhanced income

What separates HCAL from plain-vanilla bank ETFs is its use of leverage. The fund targets approximately 1.25 times exposure. For every $100 in investor capital, it borrows roughly $25 and invests a total of $125 in bank stocks.

That amplifies both gains and losses. In strong markets, returns are boosted. In downturns, drawdowns are deeper. This is not free money. It is a calculated increase in risk.

However, the leverage also enhances dividend income. Because the fund owns more shares than your invested capital alone would allow, total distributions are higher. At current levels, HCAL offers a yield of roughly 4.3%, paid monthly.

For investors focused on compounding income, especially inside a Tax-Free Savings Account (TFSA) where reinvested dividends can grow tax-free, that monthly payout can be attractive.

You are essentially making a leveraged bet on the long-term resilience of Canada’s banking oligopoly. If you believe the Big Six will continue to generate profits, grow dividends, and navigate economic cycles, HCAL provides a scaled-up version of that exposure.

Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool recommends Hamilton Enhanced Canadian Bank ETF. The Motley Fool has a disclosure policy.

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