Canadian banks hold a reputation for being robust and generous with their dividend yields. Naturally, if you are learning how to start investing in Canada, you might want to begin with a sector that has a reputation for providing investors with safe returns.
If you don’t have a good understanding of individual banking stocks to determine which is the best for you, you can consider investing in a Canadian banking Exchange-Traded Fund (ETF).
The rising popularity of investing in ETFs is allowing Canadian investors to gain exposure to baskets of securities managed by professional investment firms, allowing them to benefit from a professionally managed portfolio of equity securities.
If you’re looking for a Canadian banking ETF that lets you invest in a group of banking stocks, the BMO Equal Weight Banks Index ETF (ZEB) can be a viable solution for you.
My BMO ZEB ETF review will take a closer look at this ETF to help you determine whether investing in the Canadian bank ETF will be suitable for you.
Invest In Canadian Banking Stocks
Gain relatively safer exposure to a basket of Canadian banking stocks through an ETF that tracks the performance of the top financial institutions in the country.
- Provides easy exposure to a basket of top Canadian banks
- Focuses on Canada’s reliable banking sector
- Can be used to express a sector view
- Provides monthly dividend income
- The ETF is not geographically diversified
- It has no exposure to fixed-income securities
- It does not diversify into other sectors
What Is BMO ZEB ETF?
The BMO Equal Weight Banks Index ETF is a financial instrument that launched on the TSX on October 20, 2009, and it is designed to emulate, to the extent possible, the performance of the Solactive Equal Weight Canadian Banks Index net of expenses.
The fund invests in and holds the constituent securities of the index in the same manner as they might be held within the underlying index.
The Solactive Equal Weight Canadian Banks Index includes securities listed in the Canadian bank industry. The constituent securities are subject to liquidity screens and a minimum market capitalization.
Additionally, the index allocates an equal weight to each of the securities instead of weighting the holdings based on the individual securities’ market capitalization.
Most ETFs tend to diversify across various sectors, geographical locations and provide exposure to equity securities and fixed-income assets to align with the investing goals defined by the investment firm for that fund. However, BMO ZEB ETF exclusively invests in the Canadian banking sector.
With the entirety of its assets allocated towards a limited number of equity securities in the Canadian banking sector, BMO ZEB ETF can be considered a method to reflect on the growth of the sector’s top operators on the stock market.
The ETF does not provide any diversification into securities from other sectors of the economy.
Typically, this section of my BMO ZEB ETF review would discuss the asset allocation split between equity and fixed-income securities. However, BMO ZEB ETF invests entirely in Canadian banking stocks without any exposure to fixed-income securities.
The securities held within the fund do not seek any exposure to bonds or other fixed-income securities, entailing a certain degree of capital risk in case the securities depreciate on the stock market.
The Canadian banking sector is well-known for providing reliable long-term returns and paying shareholder dividends. It means that despite the apparent capital risk, it is a relatively safer ETF to consider investing in than other ETFs that have a narrow focus on a few equity securities.
This section of my BMO ZEB ETF will cover the top holdings for the ETF.
This section of my ZEB ETF review would have typically discussed its top ten holdings, but the fund holds only six, namely, the Canadian Imperial Bank of Commerce (17.84% of the fund), the Bank of Montreal (17.68% of the fund), the National Bank of Canada (17.20%), the Royal Bank of Canada (16.96%), the Toronto-Dominion Bank (15.40% of the fund), and Scotiabank (15.02% of the fund).
BMO ZEB MER And Fees
BMO ZEB ETF charges a management fee of 0.25%, and it comes with a Management Expense Ratio (MER) of 0.28%. The ETF is not as pricy compared to many other ETFs offering exposure to the banking sector in Canada.
Additionally, the fund’s MER is significantly lower than any mutual fund product providing similar features and benefits. The typical fees for mutual funds can be higher than 2%. ETFs like BMO ZEB offering lower MERs is also an important reason why many Canadians increasingly prefer ETFs over mutual funds now.
BMO ZEB Performance And Returns
Since BMO ZEB ETF provides you with exposure only to the top six financial institutions in the Canadian banking sector, it is no surprise to see that the fund’s performance has consistently been prolific, barring the sudden dip that came along with the onset of the global health crisis that shook the entire stock market.
The ETF is already well past its all-time highs, and it shows no signs of slowing down in delivering stable and reliable growth.
The lack of exposure to other sectors of the economy or any fixed-income securities makes BMO ZEB ETF a relatively higher-risk investment to consider. As the dip in 2020 showed, a broader decline in the stock market can result in significant short-term pain for investors.
However, the rapid recovery of the fund also shows that investing in the top securities in a reliable sector of the economy can provide you with significant long-term gains.
BMO ZEB Dividend Yield
My favourite feature about BMO ZEB ETF is that it is a monthly dividend-paying ETF despite the fact that the underlying securities pay quarterly shareholder dividends.
The wide economic moats of the underlying securities allow the fund to finance monthly shareholder dividends comfortably. Its annualized distribution yield as of August 20, 2021, is 3.24%.
This section of my BMO ZEB ETF review will cover a few alternative financial instruments that you can compare the ETF with.
BMO Covered Call Canadian Banks ETF is one of the Canadian bank ETFs that comes the closest to BMO ZEB ETF. BMO ZWB ETF is primarily comprised of seven holdings, and one of them is BMO ZEB ETF itself. The remaining assets for the fund are allocated almost equally to the Big Six Canadian banks.
BMO ZWB ETF also pays monthly shareholder dividends and wins over BMO ZEB in terms of having a significantly higher dividend yield of 5.68%. However, it is also a costlier fund that charges a management fee of 0.65% and an MER of 0.72%.
CI Canadian Banks Income Class ETF (CIC) is another Canadian bank ETF that focuses on investing in Canadian equity securities trading in the banking sector. Managed by CI Global Asset Management, CIC ETF comprises primarily of the same holdings as for BMO ZEB ETF.
The fund pays its shareholders at a 3.71% dividend yield as of July 2021, but it comes with a significantly higher cost. The ETF has a 0.65% management fee and an MER of 0.80%.
RBC Canadian Bank Yield Index ETF (RBNK) is one of the newest ETFs among Canadian bank ETFs. It began trading on the TSX in October 2017. The fund primarily consists of the same holdings as BMO ZEB ETF.
However, the fund does not allocate its assets into the constituent banking stocks with an equal weighting.
It focuses more on Scotiabank (the fastest growing bank) and the Canadian Imperial Bank of Commerce (the largest bank). RBC RBNK ETF pays its shareholders quarterly dividends at a 3.90% dividend yield. It has a management fee of 0.29% with an MER of 0.32%.
Yes, there is. The BMO Equal Weight Banks Index ETF is one of several bank ETFs that are trading on the TSX.
There are several Canadian bank ETFs that you can consider investing in, including BMO Covered Call Canadian Banks ETF, CI First Asset CanBanc Income Class ETF, iShares Equal Weight Banc & Lifeco ETF, and the RBC Canadian Bank Yield Index ETF.
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BMO ZEB ETF is a slightly tricky investment to consider adding to your portfolio. I like the fact that the ETF provides you with monthly dividend payouts. You can add it to your portfolio as a monthly income-generating asset.
The ETF also provides you with a simpler way to get exposure to the top banking stocks instead of individually adding each one to your portfolio.
However, the high management fee and MER will eat into your profits, especially as the holdings within the fund keep appreciating in the long run.
You can easily replicate the performance of this ETF by adding the individual stocks to your portfolio at a minimal cost, provided that you intend to buy and hold the assets for the long haul.
You won’t get monthly payouts since the individual holdings pay quarterly shareholder dividends, but the cost will be significantly lower.
If you want to add dividend-paying ETFs to your portfolio, I suggest you check out my list of the best dividend ETFs in Canada to learn how to earn easy passive income.