Canadian Bank ETF Competition Heats Up as Horizons ETFs Slashes HBNK MER to 0%
Horizons' move to drastically cut fees has big implications for competitors like BMO Global Asset Management and Canadian Investors.
The competitive landscape in the Canadian ETF market just underwent a quiet, but potentially significant shift. Recently, Horizons ETFs slashed the management expense ratio, or MER of the newly launched Horizons Equal Weight Banks Index ETF (HBNK) to 0%. Until July 31st, 2024, HBNK will be effectively free for investors to purchase, barring brokerage commissions and bid-ask spreads.
This strategic decision could have far-reaching consequences for other market players like BMO Global Asset Management, who currently control the bulk of investor inflows when it comes to Canadian bank focused ETFs. By slashing fees to 0%, Horizons ETFs are consciously appealing to the desires of Canadian investors, many of whom desire low-cost access to funds.
Here's all you need to know about the Canadian bank ETF landscape and how HBNK stacks up to existing competitors.
Canadian bank ETFs
In terms of exposure, most Canadian bank ETFs offer broad exposure to Canada's largest and most influential banks, such as the Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, the Canadian Imperial Bank of Commerce, and National Bank.
These banks play pivotal roles in the Canadian economy, contributing to its stability and growth. As an investment, banks have enduring popularity among Canadians due to several compelling attributes, with stability and strength being chief among them. The Canadian banking system is reputed for its reliability and robustness, offering a level of resilience that has proven critical in times of financial crisis.
Another significant factor is the high dividend yields typically associated with Canadian banks. These institutions have a history of paying substantial dividends, which provides an attractive income stream for investors, especially in a low-interest-rate environment.
The dividends from these banks tend to be stable, often rising over time, which further bolsters the attractiveness of ETFs based on these institutions. Moreover, many Canadian bank ETFs pay monthly distributions, a rate more frequent than the quarterly dividend payouts offered by their holdings.
Diversification is another critical factor. By nature, Canadian bank ETFs include all the major banks in Canada in an equal-weight fashion, which provides a level of diversified exposure that can help reduce the risk associated with investing in individual stocks.
The current landscape
HBNK was launched fairly recently on July 5th, 2023 but has already accrued over $16.8 million in assets under management, or AUM. The ETF tracks the Solactive Equal Weight Canada Banks Index, which holds all six of the aforementioned bank stocks in equal weights.
Before the fee waiver, HBNK would have targeted a 0.09% management fee. Even without the waiver, this would have made the ETF significantly competitive in terms of costs. Right now, Horizons is projecting a 5.20% annualized yield.
HBNK isn't the only Canadian bank ETF offered by Horizons though. Since January 2019, the Horizons Equal Weight Canada Banks Index ETF (HEWB) has been a part of the firm's lineup. As one of Horizons' many "Total Return Index" (TRI) ETFs, HEWB uses swap derivatives to synthetically provide exposure to the total returns (i.e., with dividends reinvested) of the Solactive Equal Weight Canada Banks Index.
The main allure of TRI ETFs like HEWB is the lack of distributions. In a taxable account, this makes them extremely tax efficient. The ETFs also tend to have a very low tracking error compared to their benchmarks but do have some counterparty risk from the swaps. Currently, HEWB charges a 0.27% expense ratio and has just over $123 million in AUM.
Boutique ETF provider Hamilton, which specializes in income strategies also offers a Canadian bank ETF in the form of the Hamilton Canadian Bank Equal-Weight Index ETF. Like ZEB and HBNK, HEB also targets the Solactive Equal Weight Canada Banks Index. It pays monthly distributions, and currently sports a 5.26% annualized yield against a 0.19% management fee.
That being said, the largest, and most popular Canadian bank ETF is still the BMO Equal Weight Banks Index ETF (ZEB), which sits at around $3.9 billion in AUM. This ETF also tracks the Solactive Equal Weight Canada Banks Index. It offers monthly distributions, with a 5.05% annualized distribution yield against which it currently charges a 0.28% MER.
Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.
