Canada’s inventory market is closely dominated by financials, and amongst them, the Huge Six banks. For many years, they’ve been core holdings for Canadian traders due to regular earnings, an oligopolistic market construction, and a protracted, largely uninterrupted historical past of dividend development. On prime of that, their payouts qualify as eligible dividends, which obtain beneficial tax remedy in non-registered accounts.
You might exit and purchase all six banks individually. Loads of traders do. However in the event you’d moderately outsource the weighting, rebalancing, and administration, there’s no scarcity of exchange-traded funds (ETFs) that bundle them collectively.
There’s a number of selection on this house, however the one I hold coming again to is the Hamilton Enhanced Canadian Financial institution ETF (TSX:HCAL). Right here’s why I feel this Canadian financial institution ETF stands above the remaining.
Equal weight and systematic self-discipline
HCAL tracks an equal-weight index of the Huge Six Canadian banks. Which means every financial institution receives roughly the identical allocation at rebalance, as an alternative of letting the most important banks dominate the portfolio.
In a market-cap-weighted ETF, the most important banks robotically get the most important weights. If one turns into overvalued relative to the others, it continues to develop in dimension inside the fund. Equal weighting forces a disciplined rebalance. When a financial institution outperforms and turns into chubby, the ETF trims it. When one other underperforms, it provides to it.
In impact, that creates a scientific buy-low, sell-high mechanism constructed into the construction. You don’t must guess which financial institution will lead subsequent. You personal all of them in equal proportion and let the method work over time. For long-term traders who consider within the power of Canada’s banking system however don’t wish to choose favourites, that construction is interesting.
1.25x leverage and enhanced earnings
What separates HCAL from plain-vanilla financial institution ETFs is its use of leverage. The fund targets roughly 1.25 occasions publicity. For each $100 in investor capital, it borrows roughly $25 and invests a complete of $125 in financial institution shares.
That amplifies each positive aspects and losses. In robust markets, returns are boosted. In downturns, drawdowns are deeper. This isn’t free cash. It’s a calculated improve in danger.
Nonetheless, the leverage additionally enhances dividend earnings. As a result of the fund owns extra shares than your invested capital alone would permit, whole distributions are larger. At present ranges, HCAL presents a yield of roughly 4.3%, paid month-to-month.
For traders centered on compounding earnings, particularly inside a Tax-Free Financial savings Account (TFSA) the place reinvested dividends can develop tax-free, that month-to-month payout could be engaging.
You’re basically making a leveraged guess on the long-term resilience of Canada’s banking oligopoly. For those who consider the Huge Six will proceed to generate earnings, develop dividends, and navigate financial cycles, HCAL offers a scaled-up model of that publicity.