The Hamilton Enhanced Canadian Bank ETF (TSX: HCAL) has to be one of the most exciting new ETFs to land on the TSX Index in these past few years. The only thing more explosive than the Canadian bank stocks and the ETFs that follow them is one that has a bit of leverage added on top.
Undoubtedly, I’m not a big fan of leveraged ETFs, especially the ones with 2X or 3X leverage, which, in my very humble opinion, makes for a risk/reward that’s too high on the “risk” side. When things go right, they really go right. But, at the same time, when things go wrong, getting caught in a 3X leverage ETF could be the perfect formula for a hit that hurts thrice as much.
And the bad news of a really bad decline in the stocks underneath the hood could position one in a spot that makes it much harder to recover. Indeed, whenever recovery prospects dim by that much, I think investors should really take extra time to re-evaluate the risks associated with that much leverage. Of course, borrowing to invest (or investing on margin) is fine with some.
But, for the most part, I think investors should be very careful with leverage, especially for anything more than a high-conviction near-term trade. For investors who want something for the long haul, though, the Hamilton Enhanced Canadian Bank ETF really does stand out.
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Leverage — but not too much!
Why? It’s a monthly payer with a 3.5% distribution yield at the time of this writing, but what’s more interesting is how the 1.25X cash leverage has juiced returns amid one of the most fierce multi-year runs in the big Canadian bank stocks. The stock has soared by over 146% in the past two years, which is remarkable. The 25% leverage ratio, I think, is manageable by younger investors who really do believe that the big banks are still undervalued as they look to get the most out of the latest bull run.
For Canadian investors who want the perfect mix of yield and a modest amount of leverage, the HCAL really does stand out as an intriguing investment. But, of course, the big question is whether or not the big banks can keep putting up the knockout results. If they reverse course, shares of HCAL could face more pain on the way down. But, of course, we’re not talking about a 2X or 3X levered ETF here.
For many younger investors, the 1.25X cash leverage zone is the sweet spot. You will pay a higher management fee, though, currently sitting at 0.65%. It’s hefty, but for exposure across the broad basket of banks with a mild amount of leverage, I say the price of admission is worth it.
Bottom line
Perhaps the biggest reason to go for 1.25X in cash leverage is that even on the way down, the recovery hopes are not shot down as they might be for a 2X or 3X leveraged ETF. For that reason, I find the HCAL to be an intriguing and tactical fit for young investors who can handle a bit of leverage. In my view, it’s a great way to get growth from an otherwise “boring” sector.
