Not All Bank ETFs are Created Equal

These strategies all do one thing very well, and that is to provide exposure to the big 6 banks in a one-ticket solution. The one key element that these strategies have in common is that they rely on the banks performing similarly over the long run. At first thought, that sounds about right. So, in reality, have the banks all performed roughly the same in the long run?

Not quite.

Over the last 20 years, the total returns of the big 6 Canadian banks have indeed all moved toward an upward trend. However, three banks have materially outperformed the rest.

To simplify things, if a company is growing their dividend payments, this is typically a result of strong earnings growth, and if earnings are growing, a company's stock price will likely rise as well. So, have the banks been growing their dividends against the backdrop of strong earnings growth?

The short answer is yes.

Canada's big 6 banks have collectively grown their dividends by almost 400% over the last 20 years². As a collective, the banks have regularly increased dividends over time, but how about individually?

During the last 10 years and 20 years, banks that have increased their dividends the most were also the best performers most of the time². In both timeframes, the top three performers were also the top 3 dividend growers.

Now, if only there was an ETF in Canada that could use this information to formulate a strategy to Canadian bank investing.

Leveraging extensive research on the correlation between earnings growth and dividend growth for Canadian banks, TD Asset Management Inc. (TDAM, "we") has built an innovative Canadian bank ETF, TD Canadian Bank Dividend Index ETF (TBNK), providing more options and opportunities for investors.

We worked with Solactive, an indexing company, to build a custom index that follows a unique rules-based methodology that puts a higher weighting in the banks that grow their dividend the most. Specifically, once a year the index will rank all constituents from 1 to 6, based on their 12-month trailing dividend growth. The best ranked bank will get the highest weighting, the second best ranked will get the second highest weighting and so on. The portfolio then will rebalance to these weights on a quarterly basis.

We believe this to be a more unique and rewarding strategy because banks with the highest levels of profitability, and superior execution through a business cycle, will ultimately increase their dividends more quickly than their peers.

¹ Source: Morningstar Direct. Data as of April 11, 2023.
² Bloomberg Finance L.P., as of December 31, 2022. The above shows the sum of the dividend per share of the 6 big Canadian bank equity securities. Tickers: TD, RY, CM, BNS, BMO, NA.

The information contained herein has been provided by TD Asset Management Inc. and is for information purposes only. The information has been drawn from sources believed to be reliable. Graphs and charts are used for illustrative purposes only and do not reflect future values or future performance of any investment. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual's objectives and risk tolerance.

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