Toronto-based financial sector specialist Hamilton Capital Partners has introduced a Canadian bank ETF that applies leverage to a mean-reversion trading strategy.

Rob Wessel, Managing Partner & Co-Founder, Hamilton ETFs.

Listed on the Toronto Stock Exchange, the Hamilton Canadian Bank 1.25x Leverage ETF (HCAL CN) aims to provide 1.25 times the performance of the Solactive Canadian Bank Mean Reversion Index.

The ETF seeks to accomplish this by borrowing cash, commensurate with a 125% leverage ratio, to proportionally scale up its holdings in the banks that constitute the index.

The purpose is to deliver an investment solution that offers the opportunity for capital appreciation with an enhanced income yield – HCAL has a target dividend yield of 6% per annum.

The Solactive index that drives all this is already the reference for an existing Hamilton ETF, namely the Hamilton Canadian Bank Mean Reversion Index ETF (HCA CN), which launched in June this year. The launch of HCAL thus offers a moderately amplified version of that fund.

Methodology

The index follows a rules-based strategy that seeks to exploit the historical long-term mean-reversion tendencies of the Canadian banking sector. Principally, this is the propensity that the share prices of top-tier Canadian banks have shown ultimately to return to their long-run average level following spells trading above or below trend level.

The index works by allocating to the top six Canadian banks listed domestically as measured by market capitalization. Currently, this is Bank of Montreal, the Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, and the Toronto-Dominion Bank.

The weighting of these banks is determined based on the difference between each bank’s share price and its 50-day average price. Essentially, at index rebalances the three banks with the lowest percentage difference between their current price and their 50-day average price are over-weighted with a weight 80% (equivalent to 26.67% each), and the three banks with the highest percentage difference are under-weighted with a weight of 20% (equivalent to 6.67% each).

These portfolio weightings are maintained until the next index rebalance date, at which point the rebalancing process is repeated.

On a leveraged basis, the ETF invests 33.33% of its NAV in each of the banks that are over-weighted and 8.33% each in the banks that are under-weighted. To ensure that investors’ risk is limited to invested capital, the ETF’s leverage ratio will be rebalanced back to 125% within two business days of the ETF moving 2% above or below this ratio.

The fund’s cash borrowing facility is provided by National Bank Financial, which also acts as the fund’s prime broker.

‘Highest yielding’

Commenting on the launch, Rob Wessel, Managing Partner & Co-Founder of Hamilton ETFs, said, “We are excited to expand our innovative ETF offerings, with the launch of HCAL, a levered version of our Hamilton Canadian Bank Mean Reversion Index ETF (HCA).

“HCAL will provide investors with added exposure to the Canadian banking sector and offering enhanced return potential and a targeted yield of 6%+, making it one of the highest yielding Canadian bank ETFs.

“Canadian bank stocks remain well below their pre-COVID levels and HCAL is designed to help investors get more from their investment and achieve higher growth and higher dividends as the sector recovers from the credit cycle.”

HCAL comes with a management fee of 0.65%. It is Hamilton’s sixth ETF.