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New ETF - Hamilton Captial Canadian Bank Dynamic Weight HCB - for Canadian Bank investors

  • Last Updated:
  • Mar 23rd, 2019 1:24 pm
[OP]
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New ETF - Hamilton Captial Canadian Bank Dynamic Weight HCB - for Canadian Bank investors

For those who have read my post, you know that I'm not a big fan of index ETFs but I do like certain types of ETFs and this new one from Hamilton Capital is one of those which caught my eye.

Here's some highlights from a Globe and Mail article today on the ETF - New ETF offers unique investing approach to the Big Six banks -
In the cozy world of the Big Six, which control the vast majority of lending activity in Canada, today’s lagging bank stock tends to rebound relatively quickly – rewarding nimble investors who are willing to ditch their winners.

A new exchange-traded fund will now do the heavy lifting for you.

The Hamilton Capital Canadian Bank Dynamic-Weight ETF will begin trading Tuesday on the Toronto Stock Exchange under the ticker symbol HCB. It will invest in all Big Six banks, but weight the stocks based on their recent performances rather than market capitalization. It will rebalance its holdings each month.

Three bank stocks will have an 80-per-cent weighting in the fund, or about 26.5 per cent each. These are the laggards, or oversold stocks whose current prices trail their 50-day averages.

The other three bank stocks will have a total weighting of just 20 per cent, or about 6.5 per cent each. These names are the leaders, or overbought stocks trading above their 50-day averages.
A study from BMO Nesbitt Burns in 2015, using a decade’s worth of data, found a similar trend: Overweighting the prior year’s three worst-performing banks stocks and underweighting the best is a market-beating approach.
In other words, this ETF is one of the newer 'smart' ETFs and the smart part comes from following an investment theme that has worked time and time again - the worse performing bank from last year will be one of the best performing banks in the next few.

According to Hamilton's website (http://www.hamilton-capital.com/etf/hcb/), the MER on this ETF is 0.55% which is also expected to change as the actual trading cost haven't been factored in.

This ETF might be the 'cleanest' way to implement betting on the banks' long term behaviours of last year's looser being this year's winner.
33 replies
Penalty Box
Dec 27, 2013
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nice I like this
I've holding FIE for monthly income.

this ETF says "dividend to be determined". wonder what it will end up being.
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daivey wrote:
Oct 2nd, 2018 7:38 pm
this ETF says "dividend to be determined". wonder what it will end up being.
Since it overweights the laggards, the yield should be higher than cap or equal weight. Another option, from the same article: “The RBC Canadian Bank Yield Index ETF (ticker: RBNK) weights stocks according to their dividend yields: The higher the yield, the bigger the weight.” (never heard of this one before - the performance would have been similar I suppose)
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freilona wrote:
Oct 2nd, 2018 9:38 pm
Since it overweights the laggards, the yield should be higher than cap or equal weight. Another option, from the same article: “The RBC Canadian Bank Yield Index ETF (ticker: RBNK) weights stocks according to their dividend yields: The higher the yield, the bigger the weight.” (never heard of this one before - the performance would have been similar I suppose)
yeah but i dont want to figure that out. they just need to tell me what it is to start and roughly how much it will change.
[OP]
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daivey wrote:
Oct 2nd, 2018 11:12 pm
yeah but i dont want to figure that out. they just need to tell me what it is to start and roughly how much it will change.
I expect the yield to be some what fluid for one reason: The fund does monthly balancing based on past performance and not market cap. Since market cap is much slower to change than performance (ie. RY has been the largest market cap for decades while the top performer changes all of the time), the yield itself will change drastically depending on which of the BIG 6 are the laggards and which are the leaders.
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Nov 19, 2017
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I just checked out their prospectus and facts sheet...not much because it's new. Anyone know if they had made any backtesting information public?
[OP]
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organeer wrote:
Oct 3rd, 2018 12:46 am
I just checked out their prospectus and facts sheet...not much because it's new. Anyone know if they had made any backtesting information public?
According to the G&M article, no they have not. However, according to other similar investment theories (ie investing in the worse bank this year for better gains next year), the theory is sound. Have a read through this G&M article by the same author earlier this year where they back tested just buying the biggest looser or just the biggest winner - Two Canadian bank stock buying strategies that have produced amazing returns - with the last 18 years of data (back until 2000). To me, this fund uses a hybrid of the two strategies mentioned in this article but with a twist so that they can continually balance and swap out banks when their performance drops and swap in banks when their performance picks up.
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Nov 19, 2017
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Ahh, subscription paywall. :(

I'll take your word on it
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organeer wrote:
Oct 3rd, 2018 2:38 am
Ahh, subscription paywall. :(

I'll take your word on it
Buying a Canadian big bank stock is a good move for most investors, most of the time. An even better move: Buying an underperforming Canadian bank stock.

In the cozy world of the Big Six, which control the vast majority of lending activity in Canada, today’s lagging bank stock tends to rebound relatively quickly – rewarding nimble investors who are willing to ditch their winners.

A new exchange-traded fund will now do the heavy lifting for you.

The Hamilton Capital Canadian Bank Dynamic-Weight ETF will begin trading Tuesday on the Toronto Stock Exchange under the ticker symbol HCB. It will invest in all Big Six banks, but weight the stocks based on their recent performances rather than market capitalization. It will rebalance its holdings each month.

Three bank stocks will have an 80-per-cent weighting in the fund, or about 26.5 per cent each. These are the laggards, or oversold stocks whose current prices trail their 50-day averages.

The other three bank stocks will have a total weighting of just 20 per cent, or about 6.5 per cent each. These names are the leaders, or overbought stocks trading above their 50-day averages.

For the launch of the ETF, Toronto-Dominion Bank, Bank of Nova Scotia and National Bank of Canada will dominate the fund with an 80-per-cent weighting; Royal Bank of Canada, Canadian Imperial Bank of Commerce and Bank of Montreal will have a 20-per-cent weighting – until everything is rebalanced next month.

Overweighting the worst performers and underweighting the best performers might appear to be an odd strategy for success. However, the Big Six have a strong tendency to revert to the mean because of their market dominance and the fact that they don’t have to compete on price.

For data going back to 2000, we found that buying the prior year’s worst-performing bank stock and holding it for a year delivered an average annual return of 17 per cent, which is considerably better than the peer average of 11 per cent. Bank of Montreal was our top pick for 2018, given that it lagged its peers in 2017.

A study from BMO Nesbitt Burns in 2015, using a decade’s worth of data, found a similar trend: Overweighting the prior year’s three worst-performing banks stocks and underweighting the best is a market-beating approach.

For regulatory reasons, Hamilton Capital can’t divulge any back-testing data that supports its new ETF. It did, however, take a different approach that looked at mean reversion more generally.

Using monthly data for the Big Six bank stocks going back 20 years (to the end of August), it measured the performance of the prior month’s best- and worst-performing bank stocks relative to the average of their big bank peers.

Hamilton Capital found that the worst-performing bank stock outperformed its peer average 57 per cent of the time by an average of 0.69 percentage points. The best-performing bank stock underperformed its peer average 58 per cent of the time by an average of 0.51 percentage points.

This trend was exacerbated during periods of high volatility, potentially offering a smoother ride when times are tough. For example, during the 24 months that overlapped the financial crisis in 2008 and 2009, Hamilton Capital noted that the worst-performing bank stock outperformed the peer average by a dazzling 1.92 percentage points the following month.

There’s no proof that this impressive track record will continue, of course. And the ETF uses a different methodology that incorporates all six bank stocks into its holdings with a management expense ratio of 0.55 per cent.

It looks promising though. And it joins a couple of other bank-focused ETFs, giving investors access to three very different strategies for investing in Canada’s big banks.

The BMO S&P/TSX Equal Weight Banks ETF (ticker: ZEB) holds all six bank stocks in equal weights, which means that Royal Bank of Canada and National Bank of Canada, although vastly different in size, always have an equal influence. The RBC Canadian Bank Yield Index ETF (ticker: RBNK) weights stocks according to their dividend yields: The higher the yield, the bigger the weight.

Not sure if any of these ETFs is right for you? At the very least, investors now have an easy way to track how the different approaches to bank stocks are faring.
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craftsman wrote:
Oct 3rd, 2018 2:15 am
According to the G&M article, no they have not. However, according to other similar investment theories (ie investing in the worse bank this year for better gains next year), the theory is sound. Have a read through this G&M article by the same author earlier this year where they back tested just buying the biggest looser or just the biggest winner - Two Canadian bank stock buying strategies that have produced amazing returns - with the last 18 years of data (back until 2000). To me, this fund uses a hybrid of the two strategies mentioned in this article but with a twist so that they can continually balance and swap out banks when their performance drops and swap in banks when their performance picks up.
I also recall reading this article in the past. It does sound like a sound strategy with no emotional/discretionary trading involved... I might have to investigate this and replace BK.to with this ETF it is all that it's cracked up to be.
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Just because this strategy is back tested doesn’t mean it is future proof. I am not happy with premium BNS paid for last 3 acquisitions, market is punishing them for that. Same with LB when it acquired trade finance book south of border, I think acquired at par of book value.
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romeocanada wrote:
Oct 3rd, 2018 11:44 am
Just because this strategy is back tested doesn’t mean it is future proof. I am not happy with premium BNS paid for last 3 acquisitions, market is punishing them for that. Same with LB when it acquired trade finance book south of border, I think acquired at par of book value.
I agree - Past performance is never an indicator of future performance. But I agree with the methodology and premise of the ETF itself, and I was thinking of divesting BK eventually anyway. This ETF seems to be more transparent about it's goals and means to get there.
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These startegies have seemed to provide overall alpha in the past, could be an interesting addition to a portfolio if you don't want to constantly rebalance yourself.


https://www.fool.ca/2018/06/08/a-foolpr ... -strategy/


The first strategy, discussed in these pages frequently over the past couple of years, selects last year's worst-performing stock among the Big Five banks and holds it for one year.

Using 18 years of data, this strategy has delivered an average gain of 17 per cent a year (not including dividends) versus an average gain of 5 per cent for the S&P/TSX Composite Index and 11 per cent for the S&P/TSX Commercial Banks Index (a decent proxy for the Big Five). Add dividends to this strategy, and you're looking at an average total return of more than 20 per cent a year.

The second strategy for selecting outperforming bank stocks is also simple, and effective. It involves picking the stock with the highest indicated annual dividend yield in the fiscal fourth quarter of a given year, and holding the stock for a year.

For numbers going back to 2000, this strategy delivered a return of 20 per cent a year, after including dividends, outperforming the S&P/TSX Composite Index and the bank index.

https://www.theglobeandmail.com/globe-i ... e38011342/
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Interesting. I was looking into buy and hold BNS because it's relatively down. And buy other bank later when they are down.
However, HCB and RBNK does it for me.

RBNK
.33 MER
Re balance quarterly based on the yield of bank stocks.
3 Groups of 2 banks
- Top 2 - 25% each
- Middle 2 - 16.7% each
- Bottom 2 - 8.3% each

HCB
.55 MER
Re balance monthly based on mean reversion strategy
2 groups of 3 banks
- Top 3 - 27% each
- Bottom 3 - 7% each

Basically .22 MER more for 8 more re-balances per year(assuming oversold banks are the ones that have highest yield, which isn't always the case).
It's also quite a different amount of allocation between 3rd and 4th bank for HCB, instead of gradual change of RBNK.

Ideal would be to have either HCB/RBNK + VCN/ZCN/XIC without banks, but I don't know any ETF that does all Canada except banks.
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last_sd wrote:
Oct 9th, 2018 12:28 pm
Interesting. I was looking into buy and hold BNS because it's relatively down. And buy other bank later when they are down.
However, HCB and RBNK does it for me.

RBNK
.33 MER
Re balance quarterly based on the yield of bank stocks.
3 Groups of 2 banks
- Top 2 - 25% each
- Middle 2 - 16.7% each
- Bottom 2 - 8.3% each

HCB
.55 MER
Re balance monthly based on mean reversion strategy
2 groups of 3 banks
- Top 3 - 27% each
- Bottom 3 - 7% each

Basically .22 MER more for 8 more re-balances per year(assuming oversold banks are the ones that have highest yield, which isn't always the case).
It's also quite a different amount of allocation between 3rd and 4th bank for HCB, instead of gradual change of RBNK.

Ideal would be to have either HCB/RBNK + VCN/ZCN/XIC without banks, but I don't know any ETF that does all Canada except banks.
The .55 MER is only an estimate right now as the fund is new. I would expect that there would be some adjustment once it gets rolling through a few quarters.

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