There’s a quick – and newly cheap – way to get into bank stocks in advance of the dividend hikes to come.
Shares of the Big Six banks were up almost 50 per cent in the 12 months to late August on average, but there’s still a strong case for buying in.
Regulators prohibited banks from increasing dividends and buying back shares when the pandemic blew up in March, 2020, and they’re still waiting for a green light to resume. When that happens, it’s expected that dividends will be increased significantly.
An easy way to scoop up dividend increases from all big banks would be to buy the $2.1-billion BMO Equal Weight Banks Index ETF (ZEB-T), which holds all six of the big banks in more or less equal proportion. Readers of this blog may recall I was critical of ZEB recently because its management expense ratio was flat-out expensive at 0.6 per cent.
Now, BMO is addressing that problem. The management fee for ZEB (that’s the biggest component of the MER by far) will be cut to 0.25 per cent from 0.55 per cent, effective on or about Sept. 1. Expect the MER for ZEB to be roughly 0.28 per cent.
The new, lower cost of owning ZEB helps make a strong case for buying the banking sector as opposed to buying individual bank stocks. Think of the MER as a cost for rebalancing your portfolio of bank stocks on a continuing basis. No need to pay brokerage commissions to manage the portfolio with buy and sell transactions.
Kevin Gopaul, president and chief commercial officer of BMO Exchange Traded Funds, said the fee cut was made to draw attention to ZEB at a time when there’s a positive outlook for bank stocks.
“The banking sector is such an important sector for people to invest in now because of macro factors like immigration,” Mr. Gopaul said. “There will be 1.2 million new permanent residents in Canada over the next three years. A lot of those people will need banking and they’ll help the banking sector grow. Also, at some point, the Canadian banks will be permitted to resume stock buybacks and raise dividends. That further strengthens the story for the sector.”
The distribution history for ZEB – it’s available to view on the fund’s product page online – shows it’s an effective way to capture rising bank dividends. ZEB has been paying out 10 cents a month in cash for the past two years, up from 7.2 cents five years ago.
Lots of investors will prefer to choose a few bank stocks, and that’s totally legit. But if you want the entire banking sector in your portfolio, ZEB is an easy – and, now, fairly priced – way to do it.
-- Rob Carrick, personal finance columnist
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