Industry-based ETFs have taken this a step further, delivering targeted
exposure within a given industry, and are seen as particularly valuable in
broad sectors, such as financials, where the constituent industries may
exhibit divergent returns. Industry-based ETFs are undergoing an evolution
in expanding investment options by geographic regions, where investors can
now find Canadian, U.S., and global bank ETFs.
Financials, as a growth sector, have exceled through the market recovery
since the financial crisis in 2008. Within this sector, banks and insurers
are distinct groups with different return drivers. Banks earn profits by
lending money at higher rates than they pay on deposits, leveraging their
operations, and supplementing earnings by investment banking and other
lines of business. Banks are closely aligned with the traditional business
cycle: In contractions, bad loans tighten credit; in growth periods, credit
expands. In contrast, insurers are cyclically aligned with markets, earning
profits based on collecting premiums and investing those premiums in
markets and other investments. Insurers look to offset their assumed risks,
while subject to both policy risks and investment risks.
Using Canada as an example – and measuring periods from before the
financial crisis of 2008, banks have materially outperformed insurance
companies. Banks have returned 9.4% annually over the past 10 years, while
insurers have returned 2.2% annually over the same period.*
Since the election of President Trump in November 2016, bank stocks both
north and south of the Canada-U.S. border have posted strong gains, with
U.S. banks among the biggest winners. Following President Trump’s
inauguration in early 2017, banks have rallied on the Presidential promise
of delivering economic growth and bank reform. The key to sustaining this
growth momentum will be President Trump’s implementation of campaign
platforms; however, recent stumbles in pushing forward healthcare reform
may slow down other proposed changes such as bank reform.
Looking forward, banks are well positioned to have continued strong
performance in 2017 based on current expectations for deregulation, lower
taxes, increased spending, and higher interest rates. The banking industry
has quality companies with strong dividend yields, making them effective
If U.S. interest rates continue to rise, and if other countries gradually
follow suit, this will be a further benefit to banks, as it would indicate
sustained economic growth leading to wider lending spreads for banks and
increased lending opportunities. Banks perform well at the beginning of a
rising interest rate cycle, as the yield curve is steep.
BMO ETFs provide investors with the precision to invest in the banking
industry. Canadians have always viewed the banks as a key pillar of their
portfolios, delivering a high dividend yield with long-term growth.
Investing in U.S. banks provides higher growth potential with the added
benefit of aligning with evolving U.S. growth expectations. Investing
globally provides the additional benefit to North American banking exposure
of adding undervalued European banks and other stable international
* Source: Morningstar Direct, as of Feb. 28, 2017.
Mark Raes is Head of Product ETF and Mutual Funds, BMO Global Asset
This article first appeared in the Spring 2017 issue of
Your Guide to ETF Investing, published by Brights Roberts Inc. Reprinted with permission.
Notes and Disclaimer
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This communication is intended for informational purposes only. This update
represents the assessment of the markets at the time of publication. Those
views are subject to change without notice as markets change over time. The
information contained herein is not, and should not be construed as,
investment advice to any party. Particular investments or trading
strategies should be evaluated relative to each individual’s investment
objectives. Professional advice should be obtained with respect to any