The eruption of so many new ETFs in the Canadian market is putting more responsibility on investors to make sure they understand what they’re buying.
The need to spell this out was driven home in a recent e-mail from a reader who seems dissatisfied with the RBC Canadian Bank Yield Index ETF (RBNK-T).
“RBNK isn’t performing as well as the six individual banks it holds,” she wrote. “With an MER of 0.33 per cent, what is your opinion of the value of holding this ETF versus owning individual bank stock?”
RBNK holds the Big Six banks, but not in equal proportion. Stocks are weighted by dividend yield, so that high-yielding banks have a heavier weighting than lower-yielding banks. This strategy puts generating yield over growth. Generally speaking, higher-growth stocks tend to have lower yields, and vice versa.
Frankly, one year is not enough time to judge any type of investment. Three to five years is better. But let’s dig into RBNK to see what’s up.
The yield on RBNK is about 3.9 per cent and the one-year total return to April 30 is 6.7 per cent. Now, let’s compare that with the BMO Equal Weight Banks Index ETF (ZEB-T), which holds the Big Six banks in more or less equal proportion. The yield here is around 3.5 per cent and the one-year total return is 7.5 per cent. ZEB’s better one-year return comes despite a management expense ratio that, at 0.62 per cent, is nearly twice the 0.33 per cent of RBNK.
RBNK is for investors who want a portfolio of bank stocks tuned for yield, while ZEB is more for the investor looking for total returns. Both are a convenient way to get exposure to the major banks equally in a single package, but they differ in mission. This is the kind of nuance investors need to be wary of as ETF companies boost their product offerings to draw new money.
The reader who asked about RBNK sounds like she’s more interested in total returns than yield. So RBNK, even with its reasonable MER, may not be the right choice if she’s willing to jump to conclusions based on one year. This leaves two alternatives: ZEB, where investors pay a stiff MER for the convenience of a portfolio that instantly gives you equal exposure to the Big Six, or a portfolio of individual bank stocks that will incur costs of up to $10 for each buy and sell transaction. Buying the stocks is cheaper than the ETF with an investment of $10,000 or more (six $10 commissions equals 0.6 per cent of $10,000).