BMO EQUAL WEIGHT BANKS INDEX ETF (ZEB.TO)

A Top Pick two weeks ago. Bank stocks do well from mid-September until the last week in November. It is starting to go higher and about to test an all time high. There is a good reason to believe it will go above the previous all time high.

Historically, banks have had 2 periods of seasonal strength. One of them is right around now through until the end of November. Bank CEOs love to give you good news as you get into the 4^th quarter, when they release their results. Technically, it looks like we have started into seasonal strength right now.

(A Top Pick Feb 16/16. Up 38.89%.)

(A Top Pick Oct 27/16. Up 10.31%.) Canadian banks have a seasonal period from October 10 into the end of the year. Sometimes, if you see a strong Q3 earnings, which we did this year, they will very often start to fade going into Q4.

This gives you a basket of equal weighted names at about 16.5% each. You are paying 62 basis points for 6 banks. If you have a conviction about 1 or 2 banks, he would probably go the route of buying 1 or 2. The ZEB is a great way to play the entire Canadian banking sector.

He is looking at the bank sector itself which does well until December.

There are various ETF’s in the banking sector, and this one is fine, particularly if you are a smaller investor, because you get the diversification.

This whole new mortgage rules coming down has obviously caused a lot of consternation, and there has already been a bit of follow up from it. No matter what happens with all these mortgage rules, we know that Canadian banks are probably going to have a slowing mortgage business. They are also going to be seeing more intense capital requirements to back up some of the mortgages. Also, if interest rates start to rise that will become a good thing.

The technical rule for him is that you cannot have a rising market without the leadership or participation from the financial sector, so he likes the banks. The banks have weathered well and have done well through all the past crises, and he thinks they can manage this one.

Canadian Banks. They have been great long term investments, but dropped 50% in the financial crisis. The growth of earnings during the leverage buildup over the last 30 years is now behind us so growth in banks is behind us. He likes this ETF to play banks. There are no risks except market risks. He does not see growth in banks, however, so wait and buy bank lower in the near future. The demographics and growth from India are likely to be fantastic and it will be the new China. More allocation to India is called for, but they are 1% of the world so 5% is really overweighted. 25% weighting in Canadian banks is only called for if it is not registered and you get the dividend tax credit.

One, several, or an ETF in Canadian Banks? If the amount is under $20,000, you are probably better off with an ETF such as BMO’s Equal Weight Bank ETF (ZEB-T). There are really no wrong answers on this.

Banks have come off quite a bit now. He would normally be doing the ZWB, but he likes the lift that he thinks he can get going down the road this year. He particularly likes Royal (RY-T) and TD (TD-T) for US$ exposure. This gives you about 4% yield.

Bank stocks in Canada have very distinctive seasonality. They are different than seasonality for US banks. Seasonality runs from September through until the end of November when they report their 4^th quarter results. Then they don’t do much until around the end of February, when they again go into a period of seasonal strength. That usually lasts until about May. Chart shows signs of bottoming, but we are not at the end of February yet. When you see them bottoming, that will be a sign to play the next seasonal trade.

(A Top Pick Oct 20/15. Down 5.39%.) Canadian banks tend to do well from Oct 10 until the end of December. Banks can fade away once they start coming out with their earnings. He exited his position before the banks came out with their earnings.

ZEB-T Vs. ZWB-T. He does not like the growth in earnings outlook for Canadian banks over 3-5 years. Prefers ZWB-T because of the covered call overlay. If the banks went down 20% for some reason then he would look at ZEB-T again.