Choosing a Canadian bank can be difficult. Buying an ETF like the BMO Equal Weight Canadian Banks Covered Call Index ETF (TSX:ZWB) can take the guesswork out. A generous monthly income and equal weight strategy are convenient and efficient.
If the market is giving you whiplash this year, try a less stressful strategy. Picking individual stocks can be a lot of fun and very rewarding when you find the right ones, but can also be a portfolio killer if you get it wrong. Some banks fell more sharply than others.
Choosing an ETF takes the stress out of choosing a particular bank. This gives you exposure to the sector, but removes the need to make selections. BMO Equal Weight Canadian Banks Index ETF (TSX:ZEB) or BMO Equal Weight Canadian Banks Covered Call Index ETF (TSX:ZWB) are good choices. Both ETFs offer sector exposure while removing the need to choose the right bank.
Generous income
For many people, income is one of the main reasons to buy Canadian banks. These have been steady income generators over the years, pumping out yields in excess of 3%. Currently, you can buy Canadian bank shares, such as Bank of Nova Scotia, with yields well over 6%. Unfortunately, this exposes you to bank-specific risk.
If you buy ZEB today, you will get a somewhat lower yield than holding a bank itself. The yield on the ETF is about 4.26%, much smaller than each of the big banks. The reason the yield is smaller is due to the fact that there is a fairly hefty, in ETF terms, fee on the units. The management expense ratio (MER) for ZEB sits at 0.55%. That is the price of having BMO do the rebalancing of this equal-weight ETF for you.
If you want a larger income from your bank ETF, you should look at ZWB. This ETF has a far more substantial income stream with a yield of 7.35%. The extra yield comes from a covered call strategy, which generates extra premium on your shares. This strategy involves more trades, which generates more fees, so the MER is slightly higher at 0.65%.
Other benefits
Another benefit of owning the units as opposed to individual bank shares is that they pay out their income in monthly installments as opposed to quarterly. You can get your income at the beginning of every month, helping you to plan if you are using the income for living expenses.
Choosing the ETFs can also be a cheaper way to buy shares, depending on the trading account. In certain brokerages, you can buy ETF shares for free. Over time, you can reinvest those shares in small amounts, never worrying about spending too much on fees.
Also, since the units themselves are cheaper on a dollar basis, you can buy a unit for $13 a share for ZWB or $22 a share for ZEB, making it easier to reinvest your dividends.
The bottom line
Using ETFs such as ZWB and ZEB can be great ways to buy shares of companies with less bank-specific risk. With the coronavirus threatening our economy, I would lean towards buying ZWB at the moment. It has a higher yield, and the covered call premiums help mitigate the downside. If the economy appears to be turning around, ZEB would be a better call, since you would not be forced to sell shares if the calls are exercised.
Should You Invest $1,000 In Bmo Equal Weight Banks Index Etf?
Before you consider Bmo Equal Weight Banks Index Etf, you’ll want to hear this.
Our market-beating analyst team just revealed what they believe are the 5 best stocks for investors to buy in September 2026 … and Bmo Equal Weight Banks Index Etf wasn’t on the list.
The online investing service they’ve run for nearly a decade, Motley Fool Stock Advisor Canada, is beating the TSX by 21 percentage points. And right now, they think there are 5 stocks that are better buys.