There’s no doubt that Canadian banks are some of the best businesses you can buy and hold for the long haul.
They operate in a tightly regulated market with massive barriers to entry. They have huge scale, loyal customers, and diversified revenue from lending, deposits, wealth management, and payments. Furthermore, they’re also consistently generating earnings and strong free cash flow.
Plus, the big banks all have rock-solid balance sheets, and they have a proven track record of paying and growing dividends through every recession and crisis Canada has seen.
And when the economy eventually rebounds, banks often benefit from higher loan demand and better margins. That makes them ideal for patient investors who want reliable income and steady compounding over decades.
However, because Canadian banks are such excellent investments, and because their businesses are so similar to each other, it can often be difficult trying to pick individual names in the sector. That’s why many Canadians prefer a good bank exchange-traded fund (ETF) to buy and hold for the long haul.
Buying an ETF spreads your exposure across the whole sector, so you’re betting on the strength of Canadian banking as an industry. Furthermore, when you buy a covered call ETF, you can significantly improve the yield you receive while still having exposure to those high-quality banks.
That’s why the one Canadian bank ETF I would buy and hold forever is BMO Covered Call Canadian Banks ETF (TSX:ZWB).
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Why the ZWB ETF is the best fund to buy and hold for Canadian bank exposure
There are several reasons why the ZWB ETF is one of the best ways that investors can gain exposure to the big Canadian banks.
First off, the ZWB gives equal-weight exposure to Canada’s six major banks. That means investors essentially gain equal exposure to each bank, so you’re not overly exposed to any one name. That’s ultimately the safer and more balanced approach to take.
What really makes the ZWB ETF one of the best to buy and hold for the long term, especially if you’re a dividend investor looking for exposure to Canadian banks, is the covered call strategy that it uses.
The ETF constantly sells call options on portions of its holdings and collects premiums upfront. Those premiums get added to the regular dividends from the banks, boosting the overall yield significantly.
For example, the ZWB ETF currently offers investors a yield of roughly 5.2% today. Meanwhile, BMO Equal Weight Banks Index ETF (TSX:ZEB), which is essentially the same fund, just without the covered call strategy, offers a current yield of less than 2.8%.
That’s why the ZWB ETF is one of the best ways that Canadian investors can gain exposure to the ultra-reliable Canadian banking sector.
However, it’s worth noting, though, that the trade-off of that higher yield is that some of your capital gains potential would be capped if the banks rally significantly in the short term and some of its call options get exercised.
After last year’s strong gains and with markets at highs, though, that’s less of a risk. Furthermore, in normal moderate-growth years, the extra income often more than makes up for any limited capital gains. Furthermore, you can always pair the ZWB with the ZEB ETF if you want full upside exposure.
For most investors, though, if you’re looking for a reliable ETF that offers exposure to high-quality Canadian banks that you can buy and hold forever, the ZWB ETF is the top choice.