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There are many ways to gain exposure to Canadian bank stocks, but two exchange-traded funds offer particularly innovative ways that are worth a closer look. How do these ETFs stack up?

The BMO S&P/TSX Equal Weight Banks ETF (ticker: ZEB) and the RBC Canadian Bank Yield Index ETF (ticker: RBNK) hold nothing but Big Six bank stocks, making them rarities in the ETF world where baskets of stocks tend to be large and diversified.

The ZEB fund holds the bank stocks in equal weights, which means that National Bank of Canada is just as important to the fund’s performance as Royal Bank of Canada, even though RBC’s market capitalization is more than six times larger.

The RBNK fund is different: It weights the bank stocks based on their indicated dividend yields. The two highest-yielding stocks each get a 1/4 weighting in the ETF; the next two highest-yielding stocks each get a 1/6 weighting; and the two lowest-yielding stocks each get a 1/12 weighting. Put another way, the highest-yielding bank stocks get three times the weighting of the lowest-yielding stocks.

Before we dive deeper into these two ETFs, I should disclose that I own units in ZEB. But I bought the units in 2016, when bank stocks were down and the RBNK fund hadn’t launched yet. As with most investors, I now have more options.

A number of ETFs provide hefty exposure to bank stocks. A fund that tracks the S&P/TSX 60 Index will have a 32-per-cent exposure to the Big Six banks right now. A fund tracking Canadian high-yield dividend stocks might have more than a 50-per-cent exposure to the Big Six. And a fund that focuses on the Canadian financial sector could have nearly a 70-per-cent exposure.

So why zero in exclusively on bank stocks? There is one reason: market-beating returns.

Over the past five years, the S&P/TSX Composite Commercial Banks index, where the Big Six have a 99-per-cent weighting, has delivered a total return of 86 per cent (including dividends). That beat the broad S&P/TSX Composite index by more than 40 percentage points.

The banks index also outperformed the financials sector by 19 percentage points, and it beat three different dividend ETFs by 14 to 57 percentage points.

There is no guarantee that this outperformance by the banks will continue. But it is hard to imagine a large bank doing poorly when the rest of the market is booming. And an ETF, despite the management costs, provides some diversification and automatic rebalancing.

How do they compare? The recent returns for the two bank-focused funds are remarkably similar: In 2018, ZEB is up 3.9 per cent (with dividends) while RBNK is up 2.9 per cent. But it seems likely that with longer track records (RBNK launched last October), these returns should diverge because their methodologies are intriguingly different.

By weighting all six banks equally, ZEB isn’t playing favourites, which can be a good approach for passive investors. However, in equating National Bank (fiscal third-quarter profit: $569-million) with RBC (third-quarter profit: $3-billion), it is providing substantial exposure to a more volatile stock.

Between 2014 and 2016, National Bank’s share price slid 35 per cent amid concerns about its exposure to energy companies. RBC’s share price fell just 22 per cent over the same period. Volatility can also work in your favour, though. National Bank has rallied more than 80 per cent since 2016, beating RBC’s 59-per-cent gain.

The RBNK fund currently has Canadian Imperial Bank of Commerce and Bank of Nova Scotia as its top-weighted stocks, given their relatively large dividend yields of 4.4 per cent and 4.5 per cent, respectively. The yields are high, in part, because these stocks have been performing poorly this year. Scotiabank’s share price is down 6 per cent and CIBC’s is flat.

This approach to stock selection has merit: Lagging Canadian bank stocks tend to rebound. The RBNK fund essentially overweights beaten-up stocks, boosting the fund’s dividend payout in the process. Another benefit: The RBNK fund has a management expense ratio of 0.33 per cent, which is considerably cheaper than ZEB’s MER of 0.62 per cent.

The verdict: They’re both good investments, but the RBC Canadian Bank Yield Index ETF looks like a better bet.

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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 24/05/24 0:41pm EDT.

SymbolName% changeLast
RBC CDN Bank Yield Index ETF
BMO S&P TSX Equal Weight Banks Index ETF

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