One of the big lures of exchange-traded funds is that they are a lot easier to manage than a portfolio of individual stocks.
Even within a sector, an ETF can be an appealing alternative to owning particular stocks. Take banks, for example. “I’ve done more than okay with Toronto-Dominion Bank, but now I’m looking for an ETF basket of Canadian banks as opposed to holding single stocks,” a reader recently said.
There are many financial sector ETFs holding banks, plus insurance companies and investment firms. There are also some income-focused funds that use a derivative-based strategy called covered call writing on a portfolio of bank or financial stocks. For investors who simply want the big banks packaged into an ETF, one possibility is the BMO Equal Weight Banks Index ETF , which is the picture of simplicity in simply holding more or less equal amounts of the Big Six banks.
ZEB is a brilliant ETF, but more for BMO than investors. The management expense ratio on the fund is flat out expensive at 0.6 per cent, yet BMO has attracted a robust $2-billion in assets. It’s worth noting that the BMO S&P/TSX Capped Composite Index ETF , with 236 stocks in the portfolio, has a laudably low MER of 0.06 per cent.
An alternative to ZEB is the $158-million RBC Canadian Bank Yield Index ETF , which also holds the Big Six banks. The difference here is that RBNK weights stocks in a way that emphasizes higher-yielding banks. Canadian Imperial Bank of Commerce, with a yield of 4 per cent, is the top holding at 27 per cent. National Bank of Canada, with a yield of around 3 per cent, is the smallest holding at 8 per cent.
The MER for RBNK is close to half of ZEB at 0.33 per cent. Globeinvestor.com reports the yield at around 3.3 per cent for both RBNK and ZEB, while one-year total returns for both are in the range of 63 per cent. Three-year annualized returns are likewise similar at around 12 per cent.
The comparison between ZEB and RBNK is a tough one because there’s a significant fee gap between the two, but negligible difference in recent yield and returns. The frugal ETF investor might want to go with the lower-fee option, regardless.
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