- Several high-yield ETFs and split share corps provide exposure to the Canadian banking sector while providing high income.
- ZWB and BKCC underperformed over the last 10 years, while SBC and BK outperformed.
- Newer ETF BANK.TO shows potential, with a 10% outperformance over two years compared to ZEB.
- Split share corps offer higher yields but come with greater risk due to leveraged structures.
High-Yield ETFs and Split Share Corporations in the Canadian Banking Sector
Investors looking for exposure to the Canadian banking sector often seek products that not only provide access to stable financial institutions but also offer attractive dividend yields. Two types of products that cater to this need are ETFs and split share corporations, both of which provide exposure to the banking sector while delivering high yields. Below, we’ll explore several key ETFs and split share corps that provide substantial dividend income and exposure to the Canadian banking sector, along with performance comparisons over the past decade.
1. ZWB.TO (BMO Covered Call Canadian Banks ETF)
ZWB is a well-known covered call ETF offered by BMO, focused on the Canadian banking sector. It holds a portfolio of large Canadian banks such as RBC, TD, and Scotiabank, and enhances yield through a covered call strategy. As of writing, ZWB provides investors with a high yield of around 7% annually.
The covered call strategy caps some of the upside in exchange for collecting premiums, making it an appealing choice for income-focused investors. Given the reliability and stability of Canadian banks, ZWB offers an excellent option for those looking for income with reduced volatility.
Performance Observation: Over a 10-year period, ZWB has generally underperformed compared to the broader banking sector ETF, ZEB. It shows an underperformance of around 50% of the initial investment value from 10 years ago, although the chart pattern is very similar to ZEB.
2. BKCC.TO (Mirae Asset Horizons Enhanced Income Canadian Banks ETF)
BKCC is another ETF that targets the Canadian banking sector but takes a different approach. Instead of using a covered call strategy, BKCC utilizes a more traditional income strategy, combining dividend income from major Canadian banks with selective exposure to fixed-income assets.
BKCC provides a yield around 12%, which is higher than ZWB but may suffer from potential capital depreciation potential over time.
Performance Observation: BKCC has significantly underperformed over the last 10 years, with an underperformance of approximately 90% of the initial investment value. It also appears to struggle during bull markets, such as the period from 2020 to 2022.
3. SBC.TO (Brompton Split Banc Corp.)
SBC is a split share corporation that invests in a portfolio of six large Canadian banks, with a focus on maximizing dividend yields and providing consistent income to investors. Split share corporations like SBC are structured to deliver high dividends to preferred shareholders while providing common shareholders with the potential for capital appreciation.
As of writing, SBC offers an impressive dividend yield of ~12%, thanks to its leveraged structure. However, investors should be aware of the risks associated with split share corps, particularly in down markets, as leverage can magnify losses.
Performance Observation: Over the last 10 years, SBC has outperformed by around 30% of the initial investment value. While it performs well during bull markets (whether mild or strong), it tends to underperform in bear markets. Care should be taken, especially during periods of sharp declines like March 2020.
4. BK.TO (Quadravest Bank of Montreal Split Corp.)
Another split share corporation, BK.TO, focuses on providing enhanced dividend income from a portfolio primarily made up of Canadian banks. Like SBC, it uses a leveraged structure to amplify dividend payouts, making it attractive to income-seeking investors. Currently, BK.TO offers a yield exceeding 9%, which is significantly higher than traditional ETFs like BKCC or ZWB.
Performance Observation: Over the past 10 years, BK.TO has shown an outperformance of approximately 20% of the initial investment value. However, its chart pattern is somewhat inconsistent, as it tends to underperform except during strong bull markets.
5. BANK.TO (Evolve Canadian Banks Enhanced Yield ETF)
Though relatively newer with only two years of stock data, BANK.TO is an honorable mention for those looking for a more recent product in this space. This ETF employs an enhanced yield strategy by investing in Canadian banks and using covered calls to generate extra income. Its yield is 15.39% as of writing, making it an interesting alternative for those willing to trade some capital appreciation for high yield.
Performance Observation: In the short two-year history, BANK.TO has outperformed by around 10% of the initial investment value, showing a pattern very similar to ZEB. However, it is generally outperforming ZEB, and time will tell whether its strategy can continue to deliver results.
Comparing to ZEB: A Broader Banking ETF
To provide context for these investments, we compared each of them to ZEB.TO (BMO Equal Weight Bank ETF), a broad Canadian banking sector ETF with more emphasis on capital appreciation than high yield. ZEB offers exposure to the same Canadian banks but without the covered call or leveraged structures used by the other ETFs and split share corps. Over the last 10 years, ZEB has provided more stable performance in terms of capital preservation.
Conclusion
For those seeking high yield and exposure to the Canadian banking sector, there are a number of options available, each with its own strategy and risk profile:
- ZWB.TO provides a balanced approach with a covered call strategy, offering a high yield while limiting upside potential. However, it has underperformed ZEB over the last decade.
- BKCC.TO delivers solid exposure to banks but has underperformed severely over the past decade, showing weak performance even in bull markets.
- Split share corps like SBC.TO and BK.TO offer significantly higher yields but come with added risk due to their leveraged structures. SBC has outperformed during bull markets, while BK.TO has shown mixed results.
- BANK.TO is a newer entrant that has shown promise, outperforming in its short history with a yield comparable to ZWB.
Each of these products serves a specific need depending on an investor’s goals, whether they prioritize high income, capital appreciation, or a combination of both. For income-focused investors, leveraging these products can provide a diversified approach to gaining exposure to the Canadian banking sector with high dividends. However, it's crucial to evaluate the risks, particularly with split share corporations, which can amplify both gains and losses.