The period of seasonal strength for the Canadian bank sector is approaching. One of the easiest ways to invest in the sector is to own a basket of bank stocks held by an exchange traded fund.
Thackray’s 2011 Investor’s Guide notes that the Canadian bank sector has two periods of seasonal strength. The next one is from Oct. 10 to Dec. 31. The trade has been profitable in 17 of the past 20 periods. Average return per period was 5.9 per cent plus a quarterly dividend. Strength is related to anticipation of good news when fiscal fourth-quarter earnings for the period ending Oct. 31st are released in late November or early December. Fourth-quarter reports frequently include dividend increases, announcements of share buy backs, share splits and encouraging news about prospects for the next fiscal year. Look for history to repeat.
A wide variety of exchange traded funds, that are heavily weighted in bank stocks, are available.
The best known and most actively traded ETF in the sector is iShares S&P/TSX Capped Financial Services Index Fund . Weight of the banks in the Index is 74.6 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. Dividend yield is 3.5 per cent. Management expense ratio is 0.55 per cent.
Claymore offers the Equity Weight Banc and Lifeco ETF . 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. Dividend yield is 3.9 per cent. Management expense ratio is 0.55 per cent.
BMO Capital offers the BMO S&P/TSX Equal Weight Banks Index ETF . The Index is equally weighted in Canada's top six banks: Royal Bank, Toronto Dominion, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Bank of Montreal and National Bank. Dividend yield is 4.4 per cent. Management expense ratio is 0.55 per cent.
Horizons offers leveraged products based on the daily performance of the S&P/TSX Capped Financial Services index. The BetaPro S&P/TSX Capped Financial Bull + ETF is designed to realize twice the daily upside return on the index. The BetaPro 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.
On the charts, the S&P/TSX Capped Financial Services index has a negative technical profile. Intermediate trend is down. The Index trades below its 50- and 200-day moving averages. Short-term momentum indicators are trending down. Strength relative to the TSX Composite Index has been negative since mid June. Preferred strategy is to accumulate an ETF in the sector on technical signs of a bottom, as the period of seasonal strength approaches.
Don Vialoux is author of a free daily report on equity markets, sectors, commodities and Exchange Traded Funds. Reports are available at www.timingthemarket.ca . Mr. Vialoux also is research analyst for JovInvestment Management Inc.