A No-Fee Entry Into The Pricey Lineup Of ETFs Tracking The Big Banks

It took a while, but the exchange-traded fund business has finally taken notice of the extreme level of interest Canadian investors have in bank stocks.

There are now at least six ETFs that target the big banks exclusively or at least give them a dominant weighting. The most recent of them deserves some attention because it’s temporarily doing something the banks themselves never do, which is waive fees.

The Horizons Equal Weight Banks Index ETF (HBNK) was launched July 5 with an attractively low management fee of 0.09 per cent, which suggests a management expense ratio around 0.12 per cent. However, Global X has waived fees until July 31 of next year, which means an MER of zero. Fee-free, in other words.

I did a review of five other bank ETFs back in March and the MERs ranged from 0.27 per cent to 0.61 per cent, which raises a question. Why do ETFs holding as few as six heavily traded and thus totally liquid stocks charge more than funds tracking broad indexes? You can get a Canadian equity ETF holding between 176 and 300 stocks with an MER as low as 0.05 per cent.

In charging fees that can be viewed as excessive, the ETF industry is clearly exploiting investor interest in bank ETFs. If HBNK prospers as a lower-fee alternative, the competition could result in lower costs for investors holding other bank funds as well.

The poor performance of most banks in the past year makes this an ideal time to consider bank ETFs. You get instant exposure to both higher and lower yielding banks, which is to say the worst and best performers. A stock’s dividend yield rises as the price falls, and vice versa. As of late July, Bank of Nova Scotia and Canadian Imperial Bank of Commerce had yields above 6 per cent, while the other four big banks were roughly in the 4 to 4.7 per cent range.

HBNK tracks the Solactive Equal Weight Canada Banks Index, which has more or less equal holdings of the Big Six banks. Assets in the fund total $19.6-million, which compares to $4-billion for the heavyweight of bank ETFs, the BMO Equal Weight Banks Index ETF (ZEB-T -0.29% decrease).

ZEB’s MER is 0.28 per cent, which is in line with most of its competitors. It’s worth noting that the MER for ZEB is down from 0.6 per cent a couple of years back. It seems time for another fee cut now.

— Rob Carrick, personal finance columnist

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Reprinted with the permission of The Globe and Mail – August 1, 2023