Strategy

Bank on Canadian Banks

A Tactical Time to Add Bank ETFs to Your Portfolio

Dec. 7, 2023

As 2023 draws to a close, Canadian Banks have become increasingly attractive. Investors may want to consider increasing their positions to the sector not only for their sustainable yields but, for the upside potential as well. 

Featured ETFs:

ZEB and ZWB
  • The recent quarterly earnings were constructive for Canadian banks, despite Scotia starting off reporting with a 23% EPS miss. The rest of the banks in general picked up the slack, with most of them commenting on manageable credit exposures, particularly with the backdrop of increasing projections of a soft landing.2
  • While economic outlook still challenges the banks and growth more broadly, the resilience of the consumer, labour markets, and improving market sentiment bodes well. Canadian banks continue to trade at attractive valuations on a Dividend Yield, P/E and P/B level. Currently the banks have an average P/E of 9.8 and an average P/B of 1.2 which is below its historical average P/E of 12.14 and P/B of 1.93 (since January of 2004).3
  • Price action has been very constructive over the last month, and we have seen some momentum with the Solactive Equal Weight Canadian Banks index as performance was up for the month of November by 8.47%.4

Calendar Performance:

Index

YTD

1 Month

3 Month

6 Month

1 Year

3 Year

5 Year

Since Inception

Solactive Equal Weight Canadian Banks Index

0.25%

8.47%

-0.01%

1.27%

-6.23%

9.07%

7.51%

10.13%

  • BMO, Royal, TD, CIBC, and National Bank all raised Dividends for the next quarter. After the COVID moratorium on dividend hikes, bank dividend growth is firmly back on track with a 3yr dividend growth of 8% annualized.5 Overall, Canadian banks have a reliable dividend payment; ZEB and ZWB have an annualized distribution yield of 5.29% and 7.95%.1
  • Both ZEB and ZWB are quite compelling, low-cost solutions to gain exposure to CAD banks. Despite challenging markets, ZEB and ZWB have gathered over $1.1 billion of AUM flows in 2023.6
  • The Central Banks appeared to have stopped raising rates for the time being and have signaled that the high interest rates are working its way through the economy and pushing down inflation. The BoC believes that existing rates may be restrictive enough to bring inflation down further, which may prove as a tailwind for Canadian banks.

Implementation:

For exposure to an approximate equal weighted basket of Canadian Banks consider buying BMO Equal Weight Banks Index ETF (ticker: ZEB) with an enhanced yield component the BMO Covered Call Canadian Banks ETF (ticker: ZWB) or for an accelerated option see the new BMO Canadian Bank Accelerator ETF (ticker: ZEBA).

1 Annualized Distribution Yield as of November 24, 2023: The most recent regular distribution, or expected distribution (excluding additional year-end distributions), annualized for frequency, divided by current NAV. Source: BMO Global Asset Management.

2 Bank earnings source: Bloomberg December 52023.

3 Source for P/E ratios for ZEB – BMO Equal Weight Banks ZBK - BMO Equal Weight US Banks Index ETF, ZWB – BMO Covered Call Canadian Banks: Bloomberg December 62023.

4 Calendar Performance source: Bloomberg November 302023.

5 Canadian banks 3-year dividend growth rate source: Bloomberg December 52023.

6 AUM flows source BMO Global Asset Management November 302023.

This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Particular investments and/​or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance. 

S&P®, S&P/TSX Capped Composite®, S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and TSX” is a trademark of TSX Inc. These trademarks have been licensed for use by S&P Dow Jones Indices LLC and sublicensed to BMO Asset Management Inc. in connection with the ETFs. The ETFs are not sponsored, endorsed, sold or promoted by S&P Dow Jones LLC, S&P, TSX, or their respective affiliates and S&P Dow Jones Indices LLC, S&P, TSX and their affiliates make no representation regarding the advisability of trading or investing in such BMO ETF(s).

The BMO ETFs or securities referred to herein are not sponsored, endorsed or promoted by MSCI Inc. (“MSCI”), and MSCI bears no liability with respect to any such BMO ETFs or securities or any index on which such BMO ETFs or securities are based. The prospectus of the BMO ETFs contains a more detailed description of the limited relationship MSCI has with BMO Asset Management Inc. and any related BMO ETFs. 

Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the ETF Facts or prospectus of the BMO ETFs before investing. Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated. 

For a summary of the risks of an investment in the BMO ETFs, please see the specific risks set out in the BMO ETF’s prospectus. BMO ETFs trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/​or elimination. 

BMO ETFs are managed by BMO Asset Management Inc., which is an investment fund manager and a portfolio manager, and a separate legal entity from Bank of Montreal. 

Distributions are not guaranteed and may fluctuate. Distribution rates may change without notice (up or down) depending on market conditions. The payment of distributions should not be confused with an investment fund’s performance, rate of return or yield. If distributions paid by an investment fund are greater than the performance of the fund, your original investment will shrink. Distributions paid as a result of capital gains realized by an investment fund, and income and dividends earned by an investment fund, are taxable in your hands in the year they are paid. Your adjusted cost base will be reduced by the amount of any returns of capital. If your adjusted cost base goes below zero, you will have to pay capital gains tax on the amount below zero. Please refer to the distribution policy for BMO ETF set out in the prospectus. Cash distributions, if any, on units of a BMO ETF (other than accumulating units or units subject to a distribution reinvestment plan) are expected to be paid primarily out of dividends or distributions, and other income or gains, received by the BMO ETF less the expenses of the BMO ETF, but may also consist of non-taxable amounts including returns of capital, which may be paid in the manager’s sole discretion. To the extent that the expenses of a BMO ETF exceed the income generated by such BMO ETF in any given month, quarter or year, as the case may be, it is not expected that a monthly, quarterly, or annual distribution will be paid. Non-resident unitholders may have the number of securities reduced due to withholding tax. For further information, see Distribution Policy in the BMO ETFs’ prospectus. 

An investor that purchases Units of a Structured Outcome ETF other than at starting NAV on the first day of a Target Outcome Period and/​or sells Units of a Structured Outcome ETF prior to the end of a Target Outcome Period may experience results that are very different from the target outcomes sought by the Structured Outcome ETF for that Target Outcome Period. Both the cap and, where applicable, the buffer are fixed levels that are calculated in relation to the market price of the applicable Reference ETF and a Structured Outcome ETF’s NAV (as Structured herein) at the start of each Target Outcome Period. As the market price of the applicable Reference ETF and the Structured Outcome ETF’s NAV will change over the Target Outcome Period, an investor acquiring Units of a Structured Outcome ETF after the start of a Target Outcome Period will likely have a different return potential than an investor who purchased Units of a Structured Outcome ETF at the start of the Target Outcome Period. This is because while the cap and, as applicable, the buffer for the Target Outcome Period are fixed levels that remain constant throughout the Target Outcome Period, an investor purchasing Units of a Structured Outcome ETF at market value during the Target Outcome Period likely purchase Units of a Structured Outcome ETF at a market price that is different from the Structured Outcome ETF’s NAV at the start of the Target Outcome Period (i.e., the NAV that the cap and, as applicable, the buffer reference). In addition, the market price of the applicable Reference ETF is likely to be different from the price of that Reference ETF at the start of the Target Outcome Period. To achieve the intended target outcomes sought by a Structured Outcome ETF for a Target Outcome Period, an investor must hold Units of the Structured Outcome ETF for that entire Target Outcome Period.

®/™Registered trademarks/​trademark of Bank of Montreal, used under licence.