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A battle is raging among wealth management firms as they compete for assets in a surprisingly popular financial product: exchange-traded funds that provide exposure to the shares of Canada’s Big Six banks.

Investors may be among the biggest winners in this fight as selection rises and fees drop.

The latest offering comes from Toronto-based Hamilton Capital Partners, which launched the Hamilton Canadian Bank Equal-Weight Index ETF HEB-T this week with a management fee of just 0.19 per cent – undercutting similar existing funds.

The fund holds all six bank stocks in equal weights, meaning that National Bank of Canada has as much heft as Royal Bank of Canada, even though the total market value of RBC is more than five times larger.

The idea here: Rather than betting on one bank stock, you get them all – reducing the risk of having too much exposure to a dud.

“Which bank stock is the best performer in any given year isn’t that easy for the average investor to predict,” Robert Wessel, co-founder of Hamilton Capital Partners and a former Bay Street banking analyst, said in an interview.

Now, with banks struggling as economic clouds move in, the ETF may offer a good entry point for new investors: As Mr. Wessel noted, history tends to be kind to investors who buy Canadian bank stocks when they are trading at a bargain price of less than nine times estimated earnings, as they are now.

The new fund joins a crowded field, as ETF providers cater to strong investor demand. Bank of Montreal, Royal Bank of Canada and Horizons ETFs offer bank-themed ETFs of their own. And the likes of BlackRock and Vanguard offer more diversified Canadian dividend funds, which tend to be bank-heavy.

ETFs are baskets of stocks that resemble mutual funds, but they trade on exchanges throughout the day and charge lower fees. The first ones tracked major indexes, such as the S&P/TSX 60 and the S&P 500, giving investors instant diversification with a single purchase.

ETFs based on Canada’s Big Six banks are certainly not diversified, consisting of six stocks from one sector. And some investors may scoff at the idea of paying a management fee when they can easily buy the six stocks directly.

Yet these ETFs offer an easy way to tap into compelling strategies that are particularly well-suited to banks because of their market-beating long-term returns and rising dividends.

Bank of Montreal is the grandaddy of the equal-weight approach. Its BMO Equal Weight Banks Index ETF ZEB-T was launched in 2009 and currently has $3.8-billion in assets under management. (Full disclosure: I own units.)

If equal-weighting looks bland, funds can also emphasize stocks based on attributes like dividend yield or recent performance, with automatic rebalancing included in the management fee.

The RBC Canadian Bank Yield Index ETF RBNK-T overweights stocks that offer the biggest yields – currently Bank of Nova Scotia and Canadian Imperial Bank of Commerce – in an effort to boost dividend income.

Hamilton – which has been especially busy launching bank ETFs and saw inflows of $1-billion last year, according to figures from National Bank Financial – offers the Canadian Bank Mean Reversion Index ETF HCA-T. The fund emphasizes underperforming bank stocks based on the idea that laggards within a stable oligopoly tend to rebound.

The options don’t end there.

The Hamilton Enhanced Canadian Bank ETF HCAL-T uses modest leverage to boost dividends and performance during rallies. BMO and Hamilton also offer covered-call ETFs, which generate income through call-option premiums.

That’s a lot for investors to contemplate. But the sweetener here is that even as the number of funds increases, ETFs are getting cheaper as companies cut fees to stay competitive.

BMO’s equal-weight fund charged a management fee of 0.55 per cent before it cut the fee to 0.25 per cent in 2021. Now, it is facing a slightly cheaper competitor as competition heats up. BMO did not respond to a request for comment.

Hamilton is doing some price-cutting of its own. This month, it trimmed the fee on its mean reversion fund to 0.29 per cent from 0.45 per cent previously, bringing it in line with the RBC Bank Yield fund.

It’s a sizzling market for ETF providers. And investors should be happy about that.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 26/02/24 10:21am EST.

SymbolName% changeLast
Hamilton CDN Bank Equal Weight Idx ETF
BMO S&P TSX Equal Weight Banks Index ETF
RBC CDN Bank Yield Index ETF
Hamilton Canadian Bank Mean Reversion ETF
Hamilton Canadian Bank ETF

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