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

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[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.
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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: 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: 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: 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: 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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Ahh, subscription paywall. :(

I'll take your word on it
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organeer wrote: 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: 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: 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: 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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last_sd wrote: 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.
Right and the above strategy should fare better than ZEB (Equal weight big 6 banks)
According to this globe and mail article. (recent article)

ZEB vs. RBNK: Here’s the better ETF for investing in Canadian banks
DAVID BERMAN
PUBLISHED SEPTEMBER 17, 2018
UPDATED SEPTEMBER 17, 2018FOR SUBSCRIBERS
There are many ways to gain exposure to Canadian bank stocks, but two exchange-traded funds offer particularly innovative ways that are worth a closer look. How do these ETFs stack up?

The BMO S&P/TSX Equal Weight Banks ETF (ticker: ZEB) and the RBC Canadian Bank Yield Index ETF (ticker: RBNK) hold nothing but Big Six bank stocks, making them rarities in the ETF world where baskets of stocks tend to be large and diversified.

The ZEB fund holds the bank stocks in equal weights, which means that National Bank of Canada is just as important to the fund’s performance as Royal Bank of Canada, even though RBC’s market capitalization is more than six times larger.

The RBNK fund is different: It weights the bank stocks based on their indicated dividend yields. The two highest-yielding stocks each get a 1/4 weighting in the ETF; the next two highest-yielding stocks each get a 1/6 weighting; and the two lowest-yielding stocks each get a 1/12 weighting. Put another way, the highest-yielding bank stocks get three times the weighting of the lowest-yielding stocks.

Before we dive deeper into these two ETFs, I should disclose that I own units in ZEB. But I bought the units in 2016, when bank stocks were down and the RBNK fund hadn’t launched yet. As with most investors, I now have more options.

A number of ETFs provide hefty exposure to bank stocks. A fund that tracks the S&P/TSX 60 Index will have a 32-per-cent exposure to the Big Six banks right now. A fund tracking Canadian high-yield dividend stocks might have more than a 50-per-cent exposure to the Big Six. And a fund that focuses on the Canadian financial sector could have nearly a 70-per-cent exposure.

So why zero in exclusively on bank stocks? There is one reason: market-beating returns.

Over the past five years, the S&P/TSX Composite Commercial Banks index, where the Big Six have a 99-per-cent weighting, has delivered a total return of 86 per cent (including dividends). That beat the broad S&P/TSX Composite index by more than 40 percentage points.

The banks index also outperformed the financials sector by 19 percentage points, and it beat three different dividend ETFs by 14 to 57 percentage points.

There is no guarantee that this outperformance by the banks will continue. But it is hard to imagine a large bank doing poorly when the rest of the market is booming. And an ETF, despite the management costs, provides some diversification and automatic rebalancing.

How do they compare? The recent returns for the two bank-focused funds are remarkably similar: In 2018, ZEB is up 3.9 per cent (with dividends) while RBNK is up 2.9 per cent. But it seems likely that with longer track records (RBNK launched last October), these returns should diverge because their methodologies are intriguingly different.

By weighting all six banks equally, ZEB isn’t playing favourites, which can be a good approach for passive investors. However, in equating National Bank (fiscal third-quarter profit: $569-million) with RBC (third-quarter profit: $3-billion), it is providing substantial exposure to a more volatile stock.

Between 2014 and 2016, National Bank’s share price slid 35 per cent amid concerns about its exposure to energy companies. RBC’s share price fell just 22 per cent over the same period. Volatility can also work in your favour, though. National Bank has rallied more than 80 per cent since 2016, beating RBC’s 59-per-cent gain.

The RBNK fund currently has Canadian Imperial Bank of Commerce and Bank of Nova Scotia as its top-weighted stocks, given their relatively large dividend yields of 4.4 per cent and 4.5 per cent, respectively. The yields are high, in part, because these stocks have been performing poorly this year. Scotiabank’s share price is down 6 per cent and CIBC’s is flat.

This approach to stock selection has merit: Lagging Canadian bank stocks tend to rebound. The RBNK fund essentially overweights beaten-up stocks, boosting the fund’s dividend payout in the process. Another benefit: The RBNK fund has a management expense ratio of 0.33 per cent, which is considerably cheaper than ZEB’s MER of 0.62 per cent.

The verdict: They’re both good investments, but the RBC Canadian Bank Yield Index ETF looks like a better bet.

https://www.theglobeandmail.com/investi ... ian-banks/
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last_sd wrote: 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.
Based on the backtesting, I think the .22 premium should more than pay for itself. My preference: HBC > RBNK > ZEB.
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andjules wrote: Based on the backtesting, I think the .22 premium should more than pay for itself. My preference: HBC > RBNK > ZEB.
I agree with your preference.
One thing is how large will these ETFs grow in terms of assets under management.
RBNK is only 71M, HBC will take time as well.

I don't like ETFs that are so low in terms of market cap because of low volume and future uncertainty of the ETF itself.
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TQT wrote: Hamilton Capital announced the Q4 2018 distributions today for HCB. $0.042 per unit. Monthly distributions. https://www.newswire.ca/news-releases/h ... 77661.html
Looks like they changed the name of the ETF.
Hamilton Capital today announced that the name of its exchange-traded fund, the Hamilton Capital Canadian Bank Dynamic-Weight ETF is, effective immediately, changed to the Hamilton Capital Canadian Bank Variable-Weight ETF (the "ETF" or "HCB").

The estimated annual yield is 3.32% based on the NAVPU on Oct 12th according to their website.

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