The Canadian bank stocks are in the midst of a hot run, and while valuations have climbed, yields have fallen by quite a bit, I continue to view the group as still worth holding, especially if you’re looking for above-average dividend growth potential over the long haul. Of course, it can be hard to pick just one or two names from the Big Six basket. And while I do think the broad banking tailwinds could help power each one of the names through the year, going down the route of an equal-weight banking ETF could make sense in some scenarios.
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Banking on the Big Six banks amid their run
Of course, there’s the convenience of having exposure to each one of Canada’s Big Six banks. And while you’ll pay for that convenience in the form of a management expense ratio (MER), those who want to maintain an equal weighting might find that it’s actually more cost-effective to just go for a Canadian bank ETF rather than top up each of the six stocks every time one wants to add to their exposure. Indeed, the trading commissions really do add up, especially for smaller sums.
While an ETF for just six or so holdings might seem a bit excessive, I do think that those investors who can trade such products without having to pay a commission (many brokers offer commission-free trades on their own line of ETFs) may wish to go down the bank ETF route. It’s just simpler, cheaper, and can help you obtain best-in-breed exposure to some of the best-capitalized banks in the world.
As far as bankable Canadian bank ETFs are concerned, there are actually a few options to pick from. Indeed, there is a growing ETF market to concentrate on Canada’s Big Six banks, especially after the scorching run they’ve been on in the past year and a half. One thing to note, though, is that the yield is probably well below where you’d expect. These days, a bank ETF yields just shy of 3%, thanks in part to the fast rise of the group.
Many ways to play the Canadian banks from the ETF side
The BMO Equal Weight Banks Index ETF (TSX: ZEB) is a great option for investors who would prefer an equal weighting across all six banks. The 0.28% MER is a bit on the high side, in my personal opinion. But it’s a great deal when you consider how labour-intensive it is to maintain an equal balance over time.
In any case, I think it might be a better move to go for a non-equal-weighted version with the likes of the TD Canadian Bank Dividend Index ETF (TSX: TBNK), which implements a rules-based weighting prioritizing dividend growth prospects.
With a slightly lower 0.25% and a 2.9% yield, a tad less than the ZEB, the TBNK might be a better option for new long-term investors who want to max out their dividend growth rate, rather than capital gains potential or upfront yield. If you don’t want any single bank to comprise more than its fair share of the pie, perhaps the ZEB is the play.
In the past five years, the ZEB (equal weight) has outperformed the TBNK by around 5%. Sometimes, simplicity really is better. Unless you’re a TD customer who can score zero commissions from TD-branded ETFs, I’d give the slight edge to BMO’s option. Though I do think it’s a toss-up between the two for investors looking to put an extra $1,000 to work.
