Top Canadian bank ETFs for stability in 2021

Canada’s banks make up a significant part of Canadians’ investment portfolios, and they can have a place in your clients’ portfolios, too. So, this primer has been developed so you can pass on some information to your clients about the top Canadian bank ETFs, according to stability, in 2021.

The Canadian banking industry is very stable financially and its banks rank as some of the best in the world. They’re attractive to investors because they’re known to have generous dividend yields, consistent growth, and solid price appreciation over time. The big six, which includes National Bank, showed amazing resilience in the last recession and have been recovering from the pandemic’s March 2020 market crash. So, whether you hold stocks directly in the bank or through a Canadian bank exchange-traded fund (ETF), this list is worth checking out.

Are Canadian bank ETFs worth It?

If you were just asking about Canadian banks, that answer would be yes. But, dealing with some bank ETFs can be riskier since banks can be more exposed to elements – such as the housing market, foreign business, and investments in politically unstable countries – that can potentially weaken their earnings and put their dividends in danger. In an equally weighted bank ETF, one or two poorly performing banks can depress the whole ETF’s performance and distribution. That’s why some of the best, and most stable, Canadian bank ETFs just have a portfolio of six banks.

So, check out this list of the best Canadian banking ETFs, according to stability, that are currently available. Then ask your advisor to help you choose the best for your portfolio.

• BMO Equal Weight Banks Index ETF (ZEB)

Fees: 0.55%, Management Expense Ratio (MER): 0.61%, Dividend Yield: 4.77%, Assets Under Management: $1.25 billion

The BMO Equal Weight Banks Index (ZEB) is a great choice if you’re looking for exposure to Canada’s six biggest banks. Its annualized distribution yield of 3.33% is decent, however, you can earn a higher yield by holding the individual stocks. You pay a 0.61% Management Expense Ratio (MER) which translates to about $6.10 per year per $1,000 investment. ZEB has had an annualized return of 11.95% since it began. It has seen significant growth in the last year following the pandemic slump, with an amazing 55.24% return. This ETF pays dividends monthly and has a “medium” risk rating since you’re only investing in six stocks.

• CI First Asset CanBanc Income Class ETF (CIC)

Fees: 0.65%; MER: 0.80%; Dividend Yield: 5.5%; Assets Under Management: $150.9 million

This is the first ETF on the list that’s not from one of the big six banks. It was created by CI First Asset. Unlike the others, it pays quarterly, rather than monthly, dividends. It also sells call options, which are capped at 25% of the holdings inside the portfolio. The option availability and chance to earn premiums on these call options makes its fees and MER a bit higher than usual. It’s currently trading at $9.85 per share, making it cheaper than others on this list. Its price has been having trouble recovering to its pre-pandemic values. The fund claims to focus on capital appreciation, but its five-year record doesn’t support that claim. Its dividends are strong enough and its yearly returns are almost 7.6%. The holdings in this fund are more equally distributed than others on this list, but the top holding is still the National Bank of Canada. 

• RBC Canadian Bank Yield Index ETF (RBNK)

Fees: 0.29%; MER: 0.32%; Dividend Yield: 5.5%; Assets Under Management: $84 million

This fund consists of just the big six banks, but they’re not equally weighted. If the high management fees for the previous two funds – CIC and ZWB – don’t appeal to you, this RBNK ETF charges a lower fee. It distributes dividends monthly. Its 3.93% yield is higher than ZEB’s, but the10.4% annualized return that it has had since inception is lower, although it beat ZEB with a 58.3% vs. 55.24% return in the last year. RBNK is a relatively new ETF and has a medium-high risk rating. While it has a decent yield, it doesn’t show a lot of promise for capital growth. It’s not as time-tested as some of the other funds on this list, but its fees are about half of the norm for these kinds of funds.

• IShares Equal Weight Banc & Lifeco ETF

Fees: 0.55%; MER: 0.60%; Dividend Yield: 4.49%; Assets Under Management: $139.2 million

This fund was created by BlackRock’s iShares, the world’s largest ETF issuers. It differs from the other funds because it has bank, life insurance stock, and diversified financial companies’ stock holdings., which makes it a bit more volatile than the others. That can be a plus as it can keep growing, even when the banks are a bit stagnant. It’s annual growth rate over the last five years has been 7.85%. Five of the big six banks, all equally weighted, make up its top six holdings. It pays monthly dividends. Its annualized return since it began was only 8.86%, which is lower than others, but it generated a 51.35% total return in the past year. The fund is also geared more to growth than dividends. Though its yield is decent, you should consider it if you want both dividend and capital growth. 

• BMO Covered Call Canadian Banks ETF

Fees: 0.65%; MER: 0.71%; Dividend Yield: 6.41%; Assets Under Management: $1.675 billion

This fund invests in Canada’s top six banks and holds another Canadian bank ETF, the one called ZEB, noted above. Like CIC, also noted above, it uses covered call options to earn premiums, lower portfolio volatility, and potentially increase yield. Its distribution yield has been 6.41%, which is one of the most generously yielding funds on this list. Its management expense ratio (MER) is higher, at 0.71%, which equals a $7.10 fee per $1,000 investment per year. It also held several call options with various expiration dates and strike prices. It has an annualized return of 9.38% per year since it began and 44.43% in the last year.  While its dividends are generous, the fund doesn’t offer much capital growth. Even considering its value before the March 2020 crash, this fund’s share price increased by just 20% in the last five years.