Hamilton Capital launches Canadian banks ETF based on mean-reversion strategy

Oct 9th, 2018 | By | Category: Equities

Hamilton Capital has launched the Hamilton Capital Canadian Bank Dynamic-Weight ETF (HCB CN) on Toronto Stock Exchange.

Hamilton Capital Canadian Banks smart beta ETF

Hamilton Capital celebrated the launch of HCB by opening the market at Toronto Stock Exchange on 9 October 2018.

The fund invests in Canada’s ‘Big 6’ banks – Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, and the Toronto-Dominion Bank.

The fund provides concentrated exposure to the six Canadian banks with weights dynamically allocated according to a mean-reversion strategy.

Mean-reversion strategies work on the assumption that there is an underlying stable trend in the price of an asset and prices fluctuate randomly around this trend. Values deviating far from the trend will tend to reverse direction and revert to the trend.

In terms of HCB’s strategy, each month the portfolio will overweight the three most oversold banks from the prior month and underweight the three most overbought.

The fund’s methodology looks at the percentage difference between each stock’s price and its 50-day average as of the monthly rebalance date. The three banks deemed most oversold (or least overbought, if applicable), as measured by the percentage difference between their stock price and 50-day average, are assigned a weight of 26.5% each, while the three banks deemed most overbought (or least oversold) are assigned a weight of 6.5% each.

According to Hamilton Capital, this weighting approach is based on an observed historical long-term mean-reversion tendency of the sector. The firm has observed that – over short-term periods – if a Canadian bank stock significantly underperforms its peers, the probability of outperformance in the following period is materially higher. Conversely, bank stocks that have outperformed in the previous period are more likely to underperform in the next.

Rob Wessel, Managing Partner of Hamilton Capital, commented, “The mean reversion tendency of the Canadian banks is one of the most written about themes in Canadian bank investing. We are excited to launch HCB and thereby provide investors with a low cost, efficient vehicle to potentially achieve higher returns, increased diversification, and most importantly reduced risk during periods of market stress, as the benefits of mean reversion have historically been greatest during times of elevated market turbulence.”

The Canadian banking sector offers investors high quality investments with a focus on dividend growth – the fund currently offers a dividend yield of 4.0%.

The fund comes with a management expense ratio (MER) of 0.55%. Income is distributed to investors on a monthly basis.

The fund is the fourth ETF to be offered by Hamilton Capital. They include the C$90m Hamilton Capital Global Bank ETF (HBG CN), the C$75m Hamilton Capital US Mid-Cap Financials ETF (HMFU CN), and the C$70m Hamilton Capital Global Financials Yield ETF (HFY CN).

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