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Introducing a Pure “Big Six” Canadian Banks Exposure

Canadian banks are entrenched in almost every aspect of the Canadian economy. They’ve also rewarded investors with better long-term returns than the broad market.1 So, what if the “big six” is all you want for a portion of client portfolios? For one-ticket access, portfolio managers Alfred Lee and Raymond Chan introduce the new BMO Canadian Banks ETF Fund.

June 2022

Alfred Lee

CFA, CMT, DMS, Portfolio Manager & Investment Strategist

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Raymond Chan

CFA, FRM, Portfolio Manager, Exchange Traded Funds

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Key Takeaways

  • New Canadian Banks mutual fund launched to mirror BMO Equal Weight Banks Index ETF (Ticker: ZEB)
  • The BMO Canadian Banks ETF Fund provides single-ticket access one of Canada’s strongest, most stable sectors
  • Available in multiple series options—Advisor, F, T6, F6—helping Advisors build the right exposures to fit their business model
  • The quarterly dividends paid by the big six are smoothed out and paid monthly, providing monthly cashflow to investors

BMO previously launched a Canadian banks ETF (Ticker: ZEB). What is the rationale for offering this strategy in a mutual fund version? Why now?

AL Simply put, we saw an unmet need for many Advisors. Although ETFs are generally easy to purchase, they aren’t right for everyone. Some MFDA-licensed Advisors simply don’t have access to exchange-traded ETFs and many IIROC-licensed Advisors prefer using mutual funds to receive end-of-day pricing, or to service their smaller accounts. As well, a mutual fund version permits effortless dollar-cost averaging, pre-authorized contributions, and T-series withdrawals for those requiring income. This, coupled with the impressive historical strength of the Canadian banking sector, made it a no-brainer for us to bring one of our popular ETFs over to the mutual fund side. Financials are also doing incredibly well right now. And though we’ve already seen them benefit from rising interest rates, Canadian banks continue to look attractive from a valuation standpoint, trading at a fairly inexpensive price-to-earnings (P/E) ratio relative to the broad market. They’ve done well, and if their 100-year history is any indication.

What are the advantages of an equal weight strategy vs. a market cap approach?

RC The most important feature of our equal weight strategy is that it helps avoid bias to any particular bank. If we used a market cap weighted approach, we'd likely be overweight RBC right now due to its valuation. Instead, we allocate equally to each of big six banks, rebalancing semi-annually to take profits from the winners and continue our cycle of buying low and selling high.

Canadian investors may already have some exposure to banks in their portfolio. So, how would this fund fit within the portfolio of a balanced investor?

AL Yes, the Canadian equity market is overweight banks, but there’s a lot more in the broad index that investors may not want to hold. By contrast, this fund offers a pure exposure to the “Big Six” Canadian banks. No filler, no fat, no waste. It can serve as a satellite solution to any core U.S. or global equity holding. Remember, in addition to a long history of dividend payouts and increases, Canadian banks have a very good track record for performance over the long haul. In fact, Canada has received many accolades over the years for having one of the strongest banking systems in the world, with generally high credit scores and low numbers of non-performing loans.

Why would an Advisor invest in this fund rather than buy the banks directly?

RC The big advantage of this fund is it’s a one-ticket solution. Better still, it’s available in multiple series and purchase options—including Advisor, F, F6 and T6—which allows Advisors to build custom exposures to fit their particular business models. Rather than placing six individual trades every time you need to add to the position, you execute once and that’s it. This offers simplicity and reduces transactional costs compared with direct ownership. The fund is also professionally managed, with semi-annual rebalancing that’s done automatically to save time and allow you to focus on servicing your clients. The quarterly dividends paid by the big six are smoothed out and paid monthly, providing regular cashflow to investors. We also generate some pricing efficiencies by trading in large blocks on an institutional desk, making it more efficient for Advisors to manage these assets.

Markets have gone on quite the tumultuous ride in 2022. How have Canadian banks faired against the volatility?

AL The banks are down this year almost exactly in line with the TSX. However, when you look at the earnings reported by BMO, Scotia and the others, they came in higher than analysts expected in Q2. Many expected their results to be a little bit more muted this quarter, however they were actually quite strong due to the rising interest rate environment. And while many analysts are concerned about the flattening of the yield curve for the 2-year to 10-year rates, they should instead be looking at the overnight to 5-year rates. Banks typically make their profits by borrowing at the overnight rate and lending out sums with a longer time horizon, such as mortgages, loans and credit cards. They collect the spread between the short-term and long-term. And right now the gap between overnight and 5-year rates has increased significantly compared to a year ago—by about a full percentage point—which suggests the fundamentals story for the banks remains strong.

The general consensus is that a rising rate environment is positive for the banks. Has this been the case this year?

RC A rising rate environment does indeed provide a nice tailwind for the banks. It supports earnings growth, and can ultimately result in higher dividend yields, as we saw with the big six raising their dividends at the end of Q2. It’s worth noting that their dividend payout ratios are still conservative, suggesting there’s considerable room for future increases. Remember, these “divided aristocrats” have 100+ year history of raising and maintaining their dividends, which is a track record that’s virtually unheard of in other sectors. And unlike many of their global competitors, these banks are highly diversified across retail and commercial banking, wealth management, asset management, and investment banking. This gives them good insulation from macro shocks, or if one particular segment of the economy is struggling. Strategic takeovers are another thing we can expect to see from the banks in the coming months, with depressed global valuations for financials providing a buying opportunity for these cash-rich companies, if they so choose.

We often ask our portfolio managers to provide us with a book or podcast that they think our Advisor audience would enjoy. Do you have a recommendation?

AL I recently finished reading The Slight Edge by Jeff Olsen. It's about establishing positive life principles that make it easier to achieve your goals and take on new challenges. He focuses a lot on process—on why going through the pain now can make your life easier in the future, no matter what road you’re travelling down. They’re simply good practices to create and live by. In terms of podcasts, my attention is on the two that we’ve created here at BMO—the weekly market-focused Views from the Desk, which comes out every Thursday morning, and the monthly Market Insights podcast, which is more about educating clients about ETFs.



1 Comparison of BMO Equal Weight Banks Index ETF (ZEB) and S&P/TSX Composite TR from April 2012 to April 2022, BMO Global Asset Management, as of April 30, 2022.

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