An Attractive Entry Point for Canadian Banks Amid Rate Cuts

With the pace of economic growth slowing sharply in Canada and monthly CPI (Consumer Price Index) data continuously coming in lower, a rate cut by the Bank of Canada this week was highly expected. When interest rates drop, it typically eases the pressure on defaults, bringing potential tailwinds to Canada’s Big Six lenders. Now could serve as a tactical time to add or increase a weighting to Canadian banks.

Featured ETFs

Benefits

ZEB provides equal-weight exposure to large, diversified Canadian bank stocks
ZWB call option writing reduces volatility while producing monthly cash distributions
ZEBA invests in Canadian banks while earning an amplified price return of an underlying reference index up to a cap, plus dividends (before fees, expenses and taxes)

Canadian banks remain resilient even as loan loss provisions continued to weigh on profits. Recent quarterly earnings were constructive for Canadian banks as five of the six major lenders beat expectations.¹

BMO, Bank of Nova Scotia, Royal Bank of Canada and National Bank all raised dividends which bodes well for income-seeking investors. Overall, Canadian banks have a reliable dividend payment, with ZEB and ZWB boasting annualized distribution yields of 4.61% and 7.27%, respectively.²

Price action has been very constructive over the last six months, and we have seen some momentum with the BMO Equal Weight Banks Index ETF (Ticker: ZEB), which has experienced a 15.63% climb since November 2023.³

With the wide dispersions between the banks as of late, one may have the opinion that not all banks are considered equal. More specifically the performance spread between RBC and TD were as wide as 18% in May. BMO’s Equal Weight strategy is designed to remove concentration risk in a particular company. With the more recent volatility with certain Canadian banks, we have seen more stable returns from ZEB and ZWB.³

Both ZEB and ZWB are low-cost solutions to gain exposure to Canadian banks. These ETFs have remained two of the largest, most liquid Canadian bank ETFs in Canada and have gathered over $6.3 billion of AUM since inception.⁴

Big Canadian Bank Yields

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) and for the potential to accelerate growth the BMO Canadian Banks Accelerator ETF (Ticker: ZEBA).

Index	YTD	1-Month	3-Month	6-Month	1-Year	3-Year	5-Year	Since Inception
BMO Equal Weight Banks Index ETF	4.26%	2.76%	4.39%	15.63%	16.97%	4.42%	10.06%	10.22%
BMO Covered Call Canadian Banks ETF	3.95%	2.67%	3.60%	11.76%	12.78%	2.28%	7.09%	7.85%

Source: Bloomberg, as of May 31, 2024.

¹ Bloomberg, May 31, 2024.

²Annualized Distribution Yield as of May 24, 2024: 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.

³Calendar Performance source: Bloomberg May 31, 2024.

⁴AUM Flows source: BMO Global Asset Management May 31, 2024.

Disclaimer

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.

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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.

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