Canadians love their financial institution shares – and it’s simple to see why. They’re dependable, worthwhile, and have a historical past of regular dividend progress. By extension, Canadian traders additionally love financial institution exchange-traded funds (ETFs).
There’s no scarcity of choices right here. Yow will discover equal-weight financial institution ETFs, mean-reversion financial institution ETFs, yield-weighted financial institution ETFs, dividend-growth-weighted financial institution ETFs, and even lined name financial institution ETFs designed for increased month-to-month earnings at the price of capped upside.
However none of those are my decide for a growth-focused, long-term buy-and-hold funding. For that, I choose a leveraged financial institution ETF. Should you’re gonna go large, go for broke proper?
Now, I do know what you’re pondering: “Leveraged financial institution ETFs are dangerous! They’re solely appropriate for short-term buying and selling!” You’re not incorrect – most leveraged ETFs are geared for day buying and selling. Nevertheless, this ETF isn’t like the everyday leveraged choices. Right here’s why it’s price contemplating.
What makes these ETFs totally different
When Canadian traders hear “leveraged ETFs,” they often consider the traditional 2 occasions merchandise designed to multiply the day by day efficiency of an index by two. For instance, a 2 occasions leveraged Canadian financial institution ETF would theoretically rise 2% on a day when its underlying index positive aspects 1% – and drop 2% if the index falls 1%.
The issue? These ETFs reset their leverage day by day, that means the compounding impact over time turns into unpredictable. That’s as a result of they depend on derivatives referred to as swaps to attain their leverage. Whereas nice for day buying and selling, holding these ETFs long run can result in important efficiency divergence from the underlying.
The brand new era of leveraged ETFs, nevertheless, solves this difficulty. They don’t use swaps or reset day by day. As an alternative, they take a simple method – borrowing cash, just like a margin mortgage, to amplify publicity. With leverage capped at a manageable 1.25 occasions, these ETFs present a extra secure possibility for long-term traders.
The leveraged financial institution ETF to observe
The leveraged financial institution ETF I like is the Hamilton Enhanced Canadian Financial institution ETF (TSX:HCAL).
HCAL takes a portfolio of Canada’s Large Six banks, as represented by the Solactive Equal Weight Canada Banks Index, and applies 1.25 occasions leverage to it. In contrast to conventional leveraged ETFs, HCAL doesn’t use swaps or derivatives. As an alternative, it employs money margin at institutional borrowing charges to amplify its publicity.
The end result? Amplified danger and return, but additionally a lift in yield. With roughly 25% extra dividends than an ordinary financial institution ETF, HCAL affords a 6% distribution yield as of Dec. 12, 2024.
When you can anticipate extra pronounced annual volatility in comparison with a non-leveraged financial institution ETF, it’s roughly in keeping with the ups and downs of particular person Large Six banks.
Traditionally, holding 1.25 occasions leveraged Canadian financial institution publicity lengthy sufficient has additionally delivered superior returns in comparison with common financial institution investments.
