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I saluted the flag many times during my 26 years of service in the Canadian Forces. I now practise condominium law and I can predict, with certainty, that Bill C-288 will cause a flap. (Comstock/Getty Images/Comstock Images)
I saluted the flag many times during my 26 years of service in the Canadian Forces. I now practise condominium law and I can predict, with certainty, that Bill C-288 will cause a flap. (Comstock/Getty Images/Comstock Images)

ETFs

Canadian banks: Don't rush to buy them Add to ...

A word of caution on Canada’s bank stocks and related Exchange Traded Funds. The period of below average seasonal strength for the Canadian Bank sector arrived earlier than usual this year. Equityclock.com shows that the better of two periods of seasonal strength each year for Canada’s financial service stocks is between the last week in February and the last week in May. Average return during the past nine periods was 8.5 per cent plus a dividend. A period of under-performance appears from the last week in May to the last week in August and has generated an average return of 0 per cent plus a dividend.

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This year, the period of seasonal strength from the last week in February to the last week in May noted in our Feb. 27 column started well, but ended badly. From Feb. 24 to March 27 the Index gained 6.6 per cent. However, several events dampened the outlook for the sector thereafter including concerns about deteriorating economic and financial conditions in Europe, a slowdown in economic growth in the U.S. and China, declining industrial commodity prices and warnings by the Bank of Canada and Canada’s Finance Minister about excessive use of credit by Canadian consumers.

On the charts, the sector developed a negative technical profile after the end of March. The TSX Financial Services Index peaked on March 27 at 190.51, broke a key support at 181.02 at the beginning of May and established an intermediate downtrend. The Index currently is down 10.8 per cent from its March 27 peak. The Index also moved below its 20 and 50 day moving averages and broke below its 200 day moving average last week. Short term momentum indicators are deeply oversold, but have yet to show signs of bottoming. Strength relative to the TSX Composite Index turned negative in mid-April.

Earnings prospects are mildly encouraging. Canada’s top six banks are scheduled to release fiscal second quarter earnings for the period ended April 30 starting May 23. Consensus estimates show an average gain on a year-over-year basis of 8.0 per cent. Fiscal second quarter consensus estimates and expected report dates are as follow:



Bank

Consensus Estimate*

Actual Last Year

Expected Report Date

Bank of Montreal

1.36

1.35

May 23

Royal Bank

1.16

1.00

May 24

Toronto Dominion Bank

1.77

1.59

May 24

Bank of Nova Scotia

1.14

1.10

May 29

Commerce Bank

1.87

1.73

May 31

National Bank

1.83

1.69

May 31

* Source: Zacks Investment Research

Prospects for fiscal third quarter results also are mildly encouraging. Consensus estimates show an average earnings gain on a year-over-year basis of 8.1 per cent.

Preferred strategy is to wait to add to positions until the sector passes through its current period of seasonal under-performance and until technical signs of an intermediate bottom are achieved.

Canadian investors have a wide variety of Exchange Traded Funds that trade mainly on their bank content.

Best known and most actively traded ETF in the sector is iShares S&P/TSX Capped Financial Services Index Fund . The weight of the banks in the Index is 74.4 per cent. The fund holds 25 securities. Largest holdings in the fund in order of significance are Royal Bank, Toronto Dominion, Bank of Nova Scotia, Bank of Montreal and Canadian Imperial Bank of Commerce. The management expense ratio is 0.58 per cent.

iShares also offers the iShares Equity Banc and Lifeco Fund . The ETF holds Canada’s top six banks and top four insurance companies. Positions are rebalanced semi-annually. The banks represent 60 per cent of the weight in the fund. Management expense ratio is 0.61 per cent.

BMO Capital offers the BMO S&P/TSX Equal Weight Bank ETF . The Index is equally weighted in Canada top six banks: Royal Bank, Toronto Dominion, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Bank of Montreal and National Bank. Management expense ratio is 0.55 per cent.

Horizons offers two leveraged products based on the daily performance of the S&P/TSX Capped Financial Services Index. The Horizons S&P/TSX Capped Financial Bull + ETF is designed to realize twice the daily upside return on the Index. The Horizons S&P/TSX Capped Financial Bear + ETF is designed to realize twice the daily downside return on the Index. Management expense ratio is 1.15 per cent.

Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also an analyst at Horizons Investment Management, offering research on Horizons Seasonal Rotation Exchange Traded Fund, and a research analyst for JovInvestment Management Inc. All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by JovInvestment. JovInvestment is the investment manager for the Horizons family of ETFs. Daily reports are available at http://www.timingthemarket.ca/

 
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