BMO Canadian ETF Dashboard

— as of August 31, 2019 —

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Equal Weight Canadian Banks

Russ Visch

Equal Weight Canadian Banks

Macro Update

  • The banks historically benefit from the early stages of a rising rate environment. The current rate environment makes it a noteworthy time to obtain exposure to Canadian banks.
  • Over the past five years, the Solactive Equal Weight Canada Banks Index, which represents the equal-weighted performance of Canada’s six largest banks, has delivered a total return of 61.33% while the S&P/TSX Composite Total Return Index returned 27.00% during this time.

Bottom-Up Impact

  • Valuations of the Big 6 Canadian banks have hit a 10-year low, relative to their average. At the end of 2018 the average P/E of the Big 6 Canadian Banks was 9.88, compared to an historic average of 12.00 since 2009.
  • Yields on the Canadian banks are attractive. The average yield for a Big 6 Bank is around 4%.1

The Technical Analysis

The S&P/TSX Bank Index is reversing back to the upside accompanied by new buy signals in weekly momentum gauges. Consistent with our view that equity markets are bottoming following a fairly textbook cyclical bear market this is an excellent buying opportunity ahead of another leg up in this ongoing secular (multi-year/multi-decade) bull market. At a minimum this should result in the index challenging the 2018 peak at 3580 – a 12.5% gain from here. A break above that level would open a new upside target of 4178 – a 31% gain from here. While the latter target may seem excessive the average return coming out of the last two cyclical bear markets in 2011 and 2016 was 36.25%.

etf-dash-feb-2019-tsx-bank-index-en-1200-2.jpg#asset:2131

Implementation

For exposure to Canadian banks consider buying the BMO Equal Weight Banks Index ETF (ticker: ZEB) or for exposure with enhanced yield, BMO Covered Call Canadian Banks ETF (ticker: ZWB).

etf-dash-feb-2019-canadian-banks-en-1200.jpg#asset:2105





1
Source: Bloomberg, January 2019.

Russ Visch

Equal Weight Canadian Banks

Macro Update

  • The banks historically benefit from the early stages of a rising rate environment. The current rate environment makes it a noteworthy time to obtain exposure to Canadian banks.
  • Over the past five years, the Solactive Equal Weight Canada Banks Index, which represents the equal-weighted performance of Canada’s six largest banks, has delivered a total return of 61.33% while the S&P/TSX Composite Total Return Index returned 27.00% during this time.

Bottom-Up Impact

  • Valuations of the Big 6 Canadian banks have hit a 10-year low, relative to their average. At the end of 2018 the average P/E of the Big 6 Canadian Banks was 9.88, compared to an historic average of 12.00 since 2009.
  • Yields on the Canadian banks are attractive. The average yield for a Big 6 Bank is around 4%.1

The Technical Analysis

The S&P/TSX Bank Index is reversing back to the upside accompanied by new buy signals in weekly momentum gauges. Consistent with our view that equity markets are bottoming following a fairly textbook cyclical bear market this is an excellent buying opportunity ahead of another leg up in this ongoing secular (multi-year/multi-decade) bull market. At a minimum this should result in the index challenging the 2018 peak at 3580 – a 12.5% gain from here. A break above that level would open a new upside target of 4178 – a 31% gain from here. While the latter target may seem excessive the average return coming out of the last two cyclical bear markets in 2011 and 2016 was 36.25%.

etf-dash-feb-2019-tsx-bank-index-en-1200-2.jpg#asset:2131

Implementation

For exposure to Canadian banks consider buying the BMO Equal Weight Banks Index ETF (ticker: ZEB) or for exposure with enhanced yield, BMO Covered Call Canadian Banks ETF (ticker: ZWB).

etf-dash-feb-2019-canadian-banks-en-1200.jpg#asset:2105





1
Source: Bloomberg, January 2019.