The bank ETF riding the crest of a wave

There may be storm clouds around the sector, but the banks still have strong foundations for investing

The bank ETF riding the crest of a wave

Even though investor confidence in the banking sector was shaken with the fall of Silicon Valley Bank, and Canadian bank stocks felt some of that reverberation, Hamilton ETFs of Toronto experienced a $100 million inflow last month and is still optimistically offering new bank products.

“We’ve been the fast-growing ETF manager in Canada over the last couple of months,” Rob Wessel, Hamilton ETFs’ managing partner, told Wealth Professional. “Our AUM is at an all-time high.”

Wessel said Hamilton ETFs’ assets under management (AUM) now are $2.3 billion and it is rated #2 in Canadian bank ETFs with a combined AUM of $970 million. Its Hamilton Enhanced Canadian Bank ETF is the top-performing Canadian bank ETF in Canada and it had almost record inflows in the past month of $100 million in the past month. It launched its new Hamilton Canadian Financials Yield Maximizer ETF, a call ETF with mostly Canadian banks, in late January. That has already garnered $200 million of AUM which, he said, “was the most successful launch in Canada, by far, this year.”

Wessel is thoughtfully optimistic about the banking sector, particularly in Canada, despite what recently happened, primarily in the United States.

He noted that what happened to Silicon Valley Bank was “a very idiosyncratic set of circumstances hitting a very idiosyncratic company”. It primarily served the technology sector at a time when it was dropping from its pandemic high and needed its deposits to meet payroll. The bank had doubled its growth, so bought longer-dated securities just before interest rates rapidly rose. It shouldered significant unrealized losses, so had to sell many securities at a loss. That prompted an electronic run on the bank and consumer confidence was shaken as other small banks struggled, too.   

While Wessel figured that Canadian banks with U.S. operations – like TD, BMO, CIBC, and RBC – could end the first quarter with significant deposits resulting from that shake-out, he noted there could also be a regulatory reaction from it that could slow growth over the medium-term. Meanwhile, the Canadian banks have rebalanced some, though he noted they have not fully recovered since the market is still pricing in a recession.

The big six Canadian banks are still offering an average dividend yield of 4.9%. But he said Bloomberg has reported that they are still treading at less than nine times forward 2024 earnings, which is a very low multiple, even as it looks like the market is pricing in a hard landing.

“One thing we always say is history has been very kind to long-term investors who bought the Canadian banks at less than nine times earnings,” said Wessel. “So, if you’re a long-term investor, it doesn’t mean that they won’t fall from here. That could be influenced by changes in the macro environment. But, if the investors can stick it out, these are very, very strong, resilient companies. And, so far, they’re not showing any signs of any significant deterioration. In fact, they’re not showing any signs of deterioration for the most part.”

Wessel added: “The other thing we always say is that you don’t get the Canadian banks at less than nine times forward if there are sunshine and rainbows,” he added. “You get them at these valuations when there are storm clouds. The simple question investors need to ask themselves is: are the storm clouds sufficiently strong to impact the foundations that you have right now? The fundamentals? I think the answer is probably no.”

Hel said the analysts seem to be very conservative in their forecasts for loan losses this year, so he doesn’t think there’s any risk of downward revisions. So, he believes the risk of the banks missing, or not generating, the earnings that the analysts forecasting is relatively low.

Given the faith that Hamilton ETFs continues to have in the banks, it is launching the Hamilton Canadian Bank Equal Weight Index ETF today. It is an equal weighted ETF based on a selective index, with a management fee of 19 basis points. Wessel said that will make it “the lowest cost Canadian bank ETF in Canada”. It will also provide advisors with an easy, convenient way to invest in the Canadian banks at the lowest cost.