It is well known that Canadian investors favour their domestic banking oligopoly for its history of solid growth and stable dividends. What is less well known is that Australia is home to one of the world’s best banking sectors, with nearly identical long-term returns and dividends to those of the Canadian banks. A desire to provide investors with diversification to another world class banking sector in one of the most successful economies is why we launched the Hamilton Australian Bank Equal-Weight Index ETF (HBA) back in 2020. In this insight we outline several reasons why Canadian investors should consider HBA, which was awarded a FundGrade A+® Rating[1] by Fundata in 2023.

Australian Banks / HBA — Outperforming Canadian Banks

With an annualized return of +18% since inception[2] and outperformance versus Canadian banks over 1-year, 2-year, 3-years, the Hamilton Australian Bank Equal-Weight Index ETF (HBA) is an attractive complement, in our view, for Canadian investors seeking to add diversification to their core Canadian bank/financials holdings. HBA has a current annualized yield of 5.26%[3].

A Mix of Canadian/Australian Banks has Historically Produced Higher Returns & Lower Volatility

The Canadian banks are highly correlated companies with similar return profiles over the long-term. In fact, the individual bank stock price returns are so correlated to each other that the risk-profile (volatility) of a portfolio of three Canadian banks is nearly identical to that of a portfolio of four (or more) Canadian banks. In other words, there is no diversification benefit from owning more than three.

Given that the Australian banks are much less correlated to their Canadian peers, there is a strong argument for Canadian bank investors to improve their overall risk/return profile by owning a combination of both countries. The charts below highlight the benefits of a 75%/25% mix of Canadian/Australian banks, respectively; specifically, the 75/25 portfolio has achieved higher returns and lower volatility compared to either sector individually.

Australia is a Wealthier Country with a Superior Economy

The Australian economy compares favourably to that of Canada on virtually every relevant metric, including: (i) higher GDP growth; (ii) meaningfully higher GDP/capita; and (iii) a much lower debt to GDP (roughly half that of Canada[4]). This is important because revenue growth for banks is closely tied to the nominal GDP growth in the country it operates.

Similarities & Differences Between Australian and Canadian Banks

The Australian banks are among the strongest in the world and of equal quality to the Canadian banks. For readers less familiar with Australia and its blue-chip banking sector, we provide some helpful references:

• Like Canada, Australia is home to a dominant banking oligopoly, which provides powerful barriers to entry and market discipline within the sector.
• Canadian and Australian banks have similar average market caps of $100B vs. $97B, respectively[5].
• The Australian banks are some of the highest capitalized banks in the world. In fact, their regulator (APRA[6]) requires its banks to maintain materially higher core capital ratios than the Canadian banks.
• Australian banks have significantly lower acquisition risk, with a much stronger domestic focus compared to Canadian banks, which have been active acquirers, particularly south of the border.
• Australian banks have historically favoured dividends over capital deployment, generally resulting in higher payout ratios than their Canadian peers (Canadian banks typically have payout ratios between 40%-50% vs. Australian banks between 60%-75% [7])

HBA Highlights and FAQs

In our view, Canadian investors seeking a return/volatility profile similar to that of the Canadian banks but looking for added diversification should consider the Hamilton Australian Bank Equal-Weight Index ETF (HBA) as a complement. Below are answers to some frequently asked questions about investing in HBA:

• Currency Hedging — HBA is 100% currency hedged to reduce the effects of currency fluctuations
• Distributions — HBA pays quarterly distributions
• Taxation — The Canada-Australia tax treaty results in no withholding taxes for dividends paid by HBA. Australian bank dividends are classified as ‘foreign income’ for Canadian tax purposes.
• Alternatives — HBA is the only Australian bank ETF in Canada. Although investors can purchase ADRs on the NYSE, the dividends for ADRs would be subject to two layers of withholding tax (Australia to U.S. and U.S. to Canada)
• Trading — Given the significant liquidity of Australian banks, Canadian investors can easily buy/sell HBA on the Toronto Stock Exchange (TSX) as market makers can provide on-demand liquidity. When ETF investors are buying (or selling) in the market, they may transact with another ETF investor or a market maker for the ETF. At all times, even if daily volume appears low, there is a market maker – typically a large bank-owned investment dealer – willing to fill the other side of the ETF order (at net asset value plus a spread). The market maker then subscribes to create or redeem units in the ETF from the ETF manager (e.g. Hamilton ETFs), who purchases or sells the underlying holdings for the ETF (CLICK HERE to learn more).

 

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A word on trading liquidity for ETFs …

Hamilton ETFs are highly liquid ETFs that can be purchased and sold easily. ETFs are as liquid as their underlying holdings and the underlying holdings trade millions of shares each day.

How does that work? When ETF investors are buying (or selling) in the market, they may transact with another ETF investor or a market maker for the ETF. At all times, even if daily volume appears low, there is a market maker – typically a large bank-owned investment dealer – willing to fill the other side of the ETF order (at net asset value plus a spread). The market maker then subscribes to create or redeem units in the ETF from the ETF manager (e.g., Hamilton ETFs), who purchases or sells the underlying holdings for the ETF.

 

[1] For calendar year 2023 in the Financial Services Equity CIFSC Category. FundGrade A+® is used with permission from Fundata Canada Inc., all rights reserved. The annual FundGrade A+® Awards are presented by Fundata Canada Inc. to recognize the “best of the best” among Canadian investment funds. The FundGrade A+® calculation is supplemental to the monthly FundGrade ratings and is calculated at the end of each calendar year. The FundGrade rating system evaluates funds based on their risk-adjusted performance, measured by Sharpe Ratio, Sortino Ratio, and Information Ratio. The score for each ratio is calculated individually, covering all time periods from 2 to 10 years. The scores are then weighted equally in calculating a monthly FundGrade. The top 10% of funds earn an A Grade; the next 20% of funds earn a B Grade; the next 40% of funds earn a C Grade; the next 20% of funds receive a D Grade; and the lowest 10% of funds receive an E Grade. To be eligible, a fund must have received a FundGrade rating every month in the previous year. The FundGrade A+® uses a GPA-style calculation, where each monthly FundGrade from “A” to “E” receives a score from 4 to 0, respectively. A fund’s average score for the year determines its GPA. Any fund with a GPA of 3.5 or greater is awarded a FundGrade A+® Award. For more information, see www.FundGradeAwards.com. Although Fundata makes every effort to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Fundata.
[2] HBA’s annualized total return from June 26, 2020, through April 30, 2024.
[3] An estimate of the annualized yield an investor would receive if the most recent distribution remained unchanged for the next 12 months, stated as a percentage of the price per unit on April 30, 2024
[4] Government debt to GDP ratio for 2022 was 0.6 for Australia and 1.1 for Canada. Source: International Monetary Fund (IMF)
[5] Average market capitalization of the ‘Big-6’ Canadian banks vs. the ‘Big-5’ Australian banks expressed in Canadian dollars. As at April 30, 2024. Source: Bloomberg
[6] APRA stands for Australian Prudential Regulation Authority, the prudential regulatory of the Australian financial services industry.
[7] Based on company reports.

 

Commissions, management fees and expenses all may be associated with investments in exchange traded funds (ETFs) managed by Hamilton ETFs. Please read the prospectus before investing. Indicated rates of return are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends or distributions and does not take into account sales, redemptions, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Only the returns for periods of one year or greater are annualized returns. ETFs are not guaranteed, their values change frequently and past performance may not be repeated.

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