Exchange-Traded Funds (ETFs) have become increasingly popular among investors seeking diversification, simplicity, and cost-efficiency. In Canada, one sector that has garnered significant attention from investors is the financial sector, with major banks being key players in the country’s economy. Canadian bank ETFs offer a convenient way for investors to gain exposure to this crucial sector without having to pick individual bank stocks. In this blog post, we will explore the world of the top Canadian bank ETFs, their benefits, their risks, different types of bank ETFs and how they can complement your investment portfolio.
List of the Top Canadian Bank ETFs
Top Canadian Bank ETFs for September 2024:
- RBC Canadian Bank Yield Index ETF (RBNK)
- BMO Equal Weight Banks Index ETF (ZEB)
- BMO Covered Call Canadian Bank ETF (ZWB)
- Horizons Equal Weight Canadian Banks ETF (HEWB)
- CI First Asset CanBanc Income Class (CIC)
- iShares Equal Weight Banc & Lifeco (CEW)
- iShares Canadian Financial Monthly Income ETF (FIE)
- Hamilton Enhanced Canadian Bank ETF (HCAL)
- Evolve Canadian Banks and Lifecos Enhanced Yield Index Fund (BANK)
- RBC Canadian Dividend Covered Call ETF (RCDC)
Understanding Canadian Bank ETFs
Canadian bank ETFs are investment funds that track the performance of the financial sector in Canada.
These funds typically hold a basket of stocks from various Canadian banks, providing investors with exposure to the overall health and performance of the banking industry in Canada.
Top Canadian Bank ETFs in Detail
| Ticker Symbol | Last Price (CAD) | ETF Name | Forward Annual Div Yield |
| BANK.TO | 7.45 | Evolve Canadian Banks and Lifecos Enhanced Yield Index Fund | 16.25% |
| CEW.TO | 18.22 | iShares Equal Weight Banc & Lifeco ETF | 4.00% |
| CIC.TO | 11.21 | CI Canadian Banks Covered Call Income Class ETF | 7.00% |
| FIE.TO | 7.53 | iShares Canadian Financial Monthly Income ETF | 6.49% |
| HCAL.TO | 22.01 | Hamilton Enhanced Canadian Bank ETF | 7.12% |
| HEWB.TO | 35.23 | Horizons Equal Weight Canada Banks Index ETF | 0.00% |
| RBNK.TO | 23.25 | RBC Canadian Bank Yield Index ETF | 4.85% |
| RCDC.TO | 19.33 | RBC Canadian Dividend Covered Call ETF | 7.01% |
| ZEB.TO | 37.90 | BMO Equal Weight Banks Index ETF | 4.54% |
| ZWB.TO | 18.53 | BMO Covered Call Canadian Banks ETF | 7.27% |
Most Popular Canadian Bank ETFs
ETF Name: BMO Equal Weight Banks Index ETF
BMO Equal Weight Banks Index ETF has been designed to replicate, to the extent possible, the performance of the Solactive Equal Weight Canada Banks Index , net of expenses. The Fund invests in and holds the Constituent Securities of the Index in the same proportion as they are reflected in the Index.
ETF Name: Hamilton Enhanced Canadian Bank ETF
HCAL is designed to track 1.25x the returns of the Solactive Equal Weight Canada Banks Index, investing in Canadian banks — using modest 25% cash leverage. HCAL does not use derivatives.
ETF Name: BMO Covered Call Canadian Banks ETF
The Fund invests in securities of Canadian banks, and dynamically writes covered call options. The call options are written out of the money and selected based on analyzing the option’s implied volatility. The option premium provides limited downside protection. The underlying portfolio is rebalanced and reconstituted semi-annually in June and December, and options are rolled forward upon expiry.
Benefits of Canadian Bank ETFs
There are many benefits when investing in Canadian bank ETFs, Some benefits include:
Diversification: By investing in a Canadian bank ETF, you gain exposure to multiple banks in one single investment. This diversification helps reduce individual stock risk, as the performance of one bank may differ from others due to factors like managements decisions or economic conditions.
Cost-Efficiency: Canadian bank ETFs generally have lower expense ratios compared to mutual funds, making them a cost-effective option for investors. The lower fees contribute to higher returns over the long term.
Liquidity: ETFs trade on stock exchanges just like individual stocks, providing high liquidity. This means you can buy or sell your ETF shares at market prices throughout the trading day.
Transparency: Canadian bank ETFs disclose their holdings on a regular basis, allowing investors to see the underlying assets they are invested in.
Flexibility: Investors have the flexibility to hold Canadian bank ETFs in various accounts, such as Registered Retirement Savings Plans (RRSPs), Tax-Free Savings Accounts (TFSAs), or non-registered accounts.
Risks and Considerations of Canadian Bank ETFs
Investing in Canadian bank ETFs is not risk free. There are some risks to consider when investing in bank ETFs in Canada, such as:
Market Risk: Like all investments, Canadian bank ETFs are subject to market risk, and their value can fluctuate due to changes in the financial markets and the performance of the banking sector.
Concentration Risk: While Canadian bank ETFs offer diversification across multiple banks, they are still heavily concentrated in the financial sector. A downturn in the sector could negatively impact the ETF’s performance.
Economic and Regulatory Risks: The financial sector is influenced by economic conditions and government regulations. Changes in interest rates, inflation, or regulatory policies can affect the profitability of banks and, consequently, the performance of the ETF.
Currency Risk: If the ETF holds foreign bank stocks or derivatives with exposure to foreign currencies, it may be subject to currency risk, as fluctuations in exchange rates can impact the ETF’s stock price.
Dividend Risk: The dividends paid by banks may fluctuate over time, affecting the income generated by dividend-focused ETFs.
Covered Call Canadian Bank ETFs
Understanding Covered Call Strategies
A covered call strategy involves owning a specific asset, such as a stock or ETF, and simultaneously selling (writing) call options against that asset.
In the context of Canadian bank ETFs, the ETF provider owns a portfolio of bank stocks, and they sell call options on a portion of the underlying shares held within the ETF.
When an investor buys an ETF employing a covered call strategy, they are essentially acquiring the underlying bank stocks while also receiving the premium income from selling call options.
This income, generated from the option contracts, provides an additional yield on top of the dividends already paid by the ETF’s underlying bank holdings.
Benefits of Covered Call Canadian Bank ETFs
Covered call Canadian bank ETFs may not be for everyone, but there are many benefits with this type of strategy, such as:
Enhanced Income Generation: The primary advantage of covered call Canadian bank ETFs is the additional income stream generated through the sale of call options. This can provide investors with a higher yield compared to traditional bank ETFs that do not use a covered call strategy.
Downside Risk Mitigation: By collecting premiums from selling call options, investors can offset some downside risk in their bank holdings. The option premiums act as a buffer, offering partial protection against potential declines in the bank stocks’ value.
Diversification: Covered call Canadian bank ETFs offer diversification benefits by holding a basket of bank stocks. This diversification helps spread risk across multiple banks, reducing the impact of poor performance in any single stock.
Capital Appreciation Potential: Investors still have the potential to benefit from capital appreciation in the underlying bank stocks held by the ETF. If the stocks rise in value, the ETF’s net asset value (NAV) increases, potentially leading to capital gains for investors.
List of Covered Call Canadian Bank ETFs
ZWB.TO – BMO Covered Call Canadian Banks ETF
HCAL.TO – Hamilton Enhanced Canadian Bank ETF
CIC.TO – CI Canadian Banks Covered Call Income Class ETF
BANK.TO – Evolve Canadian Banks and Lifecos Enhanced Yield Index Fund
RCDC.TO – RBC Canadian Dividend Covered Call ETF
| Ticker Symbol | Last Price (CAD) | ETF Name | Forward Annual Div Yield | ETF Type |
| BANK.TO | 7.76 | Evolve Canadian Banks and Lifecos Enhanced Yield Index Fund | 11.53% | Covered Call |
| CIC.TO | 10.86 | CI Canadian Banks Covered Call Income Class ETF | 8.63% | Covered Call |
| HCAL.TO | 20.49 | Hamilton Enhanced Canadian Bank ETF | 7.71% | Covered Call |
| RCDC.TO | 19.33 | RBC Canadian Dividend Covered Call ETF | 7.01% | Covered Call |
| ZWB.TO | 18.09 | BMO Covered Call Canadian Banks ETF | 7.67% | Covered Call |
High Dividend Canadian Bank ETFs
The most common high dividend Canadian bank ETFs use a covered-call strategy and are commonly “enhanced” by using leverage between 0%-50% (1.00 to 1.50 times).
The list below shows the highest dividend CAD bank ETFs use the covered-call with and without leverage.
| Ticker Symbol | Last Price (CAD) | ETF Name | Forward Annual Div Yield | ETF Type |
| BANK.TO | 7.45 | Evolve Canadian Banks and Lifecos Enhanced Yield Index Fund | 16.25% | Covered Call |
| CIC.TO | 10.86 | CI Canadian Banks Covered Call Income Class ETF | 8.63% | Covered Call |
| HCAL.TO | 20.49 | Hamilton Enhanced Canadian Bank ETF | 7.71% | Covered Call |
| ZWB.TO | 18.09 | BMO Covered Call Canadian Banks ETF | 7.67% | Covered Call |
Canadian Banking ETFs Summary
Canadian bank ETFs provide a convenient and cost-effective way for investors to gain exposure to the dynamic financial sector in Canada.
They offer diversification, liquidity, and transparency, making them an attractive option for those looking to invest in the banking industry without the risk of holding individual bank stocks.
However, like all investments, Canadian bank ETFs come with certain risks, particularly related to market conditions and sector-specific factors.
As with any investment decision, it is essential to conduct thorough research, understand your risk tolerance, and consider the long-term outlook before adding Canadian bank ETFs to your investment portfolio. Consulting with a qualified financial advisor can also provide valuable guidance and help align your investment strategy with your financial goals.
