They operate in a tightly regulated market with enormous barriers to entry. They have enormous size, loyal customers and diversified income from loans, deposits, asset management and payments. Furthermore, they also consistently generate revenue and strong free cash flow.
Furthermore, the major banks all have rock-solid balance sheets and a proven track record of paying and growing dividends through every recession and crisis Canada has experienced.
And when the economy eventually rebounds, banks often benefit from higher loan demand and better margins. That makes them ideal for patient investors who want reliable income and stable returns over decades.
However, because Canadian banks make such excellent investments and because their businesses are so similar, it can often be difficult to choose individual names in the sector. That’s why many Canadians prefer a good bank exchange-traded fund (ETF) to buy and hold for the long term.
When you buy an ETF, you spread your exposure across the entire sector, betting on the strength of Canadian banking as an industry. Additionally, when you buy a covered call ETF, you can significantly improve the returns you receive while still having exposure to those high-quality banks.
That’s why the only Canadian bank ETF I would buy and hold forever is that BMO Covered Call Canadian Banks ETF (TSX: ZWB).
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Why the ZWB ETF is the best fund to buy and hold for exposure to Canadian banks
There are several reasons why the ZWB ETF is one of the best ways for investors to gain exposure to the major Canadian banks.
First, the ZWB gives equal exposure to Canada’s six major banks. That means investors essentially get equal exposure to each bank, so you’re not overly exposed to one name. Ultimately, that is the safer and more balanced approach.
What really makes the ZWB ETF one of the best to buy and hold for the long term, especially if you’re a dividend investor looking for exposure to Canadian banks, is the covered call strategy it uses.
The ETF continually sells call options on parts of its holdings and collects premiums in advance. These premiums are added to the banks’ regular dividends, significantly increasing the total return.
For example, the ZWB ETF currently offers investors a yield of about 5.2% today. In the meantime, BMO Equal Weight Banks Index ETF (TSX:ZEB), which is essentially the same fund, just without the covered call strategy, offers a current yield of less than 2.8%.
That’s why the ZWB ETF is one of the best ways for Canadian investors to gain exposure to Canada’s ultra-reliable banking sector.
However, it’s worth noting that the trade-off of that higher return is that some of your capital gains potential will be limited if the banks rise significantly in the short term and some of their call options are exercised.
However, after last year’s strong gains and now that the markets are at their peak, this is less risky. Moreover, in normal years of moderate growth, the additional income often more than offsets limited capital gains. Additionally, you can always pair the ZWB with the ZEB ETF if you want full upside exposure.
However, if you’re looking for a reliable ETF that offers exposure to high-quality Canadian banks that you can buy and hold forever, the ZWB ETF is the best choice for most investors.
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