HCAL – An Interesting Way to Invest in the Big Six
HCAL (Hamilton Enhanced Canadian Bank ETF) is an interesting method of gaining exposure to the Big Six, in addition to enhancing overall returns.
The Canadian “Big Six” banks have been one of the most trusted investments for investors within the Canadian space, given the profitability and stability of the companies due to the oligopolistic market structure of the Canadian banking industry. HCAL (Hamilton Enhanced Canadian Bank ETF) is an interesting method of gaining exposure to the Big Six, in addition to enhancing overall returns.
Intro to the Big Six and HCAL
The Canadian “Big Six” banks have a longstanding history with the first Canadian bank, BMO (Bank of Montreal), chartered in 1817, more than 200 years ago. Historically, the Canadian financial system was separated into five different types of institutions, including:
- Chartered Banks
- Trust/Loan Companies
- Insurance Companies
- Co-operative Credit
- Securities Dealers
However, over the past number of years of evolving legislation and consolidation, these five different types of institutions merged into the major Canadian banks, also known as the Big Six. It is clear that the Big Six banks do not only engage in retail/commercial banking activities but are more so financial conglomerates that provide various financial services.
The Big Six Banks Include:
- Royal Bank of Canada (RBC)
- Toronto-Dominion (TD)
- Bank of Nova Scotia (BNS)
- Bank of Montreal (BMO)
- Canadian Imperial Bank of Commerce (CIBC)
- National Bank of Canada (NA)
These banks have attracted many investors who seek the stability and profit-generation potential of these companies. The Big Six have created significant shareholder value and never cut dividends throughout their company history.
An interesting way to gain exposure to the Big Six, without making single stock selection choices is with HCAL(Hamilton Enhanced Canadian Bank ETF). HCAL is an ETF which holds the Big Six Canadian banks with 25% cash leverage and a mean-reversion strategy regarding weighting.
HCAL (Hamilton Enhanced Canadian Bank ETF)
- AUM: $387.0M
- Expense ratio: 0.65%
- Inception date: October 14, 2020
- Annualized Return since inception: 50.8%
What Makes HCAL More Effective?
HCAL, like all ETFs, can diversify investments in a way that is more liquid and with fewer transaction costs. However, the specific benefits of HCAL’s strategy include:
Investment in HCA (Hamilton Canadian Bank Mean Reversion Index ETF)
HCA is an index which tracks the return of the Solactive Canadian Bank Mean Reversion Index TR. This means reversion strategy is a popular theme given the Canadian banks’ long history and their tendency to perform similarly over time. It has been shown that the mean reversion strategy may enhance long-term returns and reduce downside volatility. HCA employs this strategy by reinvesting 80% into the three underperforming banks and 20% into the three banks that outperform.
Enhancement of Dividend Yield
The Big Six are known for having strong dividend yields and have never cut their dividend. By using 25% cash leverage, the dividend yield is enhanced modestly, which significantly improves the attractiveness for investors that are seeking income from a dividend. Furthermore, distributions are made monthly, which may be more attractive than investing in the banks, which distribute quarterly dividends.
Who is HCAL a Suitable Investment For?
HCAL is a suitable investment for investors that:
- View the Big Six Canadian banks as attractive investments
- Wish to have exposure to the mean reversion strategy
- Are seeking enhanced long-term returns
- Are seeking relatively higher dividends
Risks of HCAL
Like any investment, HCAL is subject to several risks. The following are some of the main risks:
- Macro-economic risk: HCAL invests in Canadian banks whose performance is highly subject to the conditions of the macroeconomic environment.
- Leverage risk: The use of leverage could result in more significant losses in the event of poor performance across the Big Six.
- Regulatory risk: The Canadian banks are highly subject to changes in the regulatory environment, which could impact their performance. For example, the proposed 15% windfall tax on taxable income greater than C$1 billion.
Data for this article is as of June 1, 2022.
Disclaimer: This article is limited to the dissemination of general information pertaining to investment strategies and financial planning and does not constitute an offer to issue or sell, or a solicitation of an offer to subscribe, buy, or acquire an interest in, any securities, financial instruments or other services, nor does it constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment.
