As explained in Hamilton Capital Global Bank ETF (HBG)’s prospectus, it is anticipated, over time, that HBG’s geographic mix will roughly represent: 50% North America, 25% Europe and 25% other countries. Although completely flexible, within the 50% allocation to North America, we generally aspire to a geographic mix of Canadian banks (15%) and U.S. banks (35%).

Given our concerns over rising direct/indirect losses from energy lending, we (i) reduced our Canadian bank exposure to ~13% from ~15%, or 2% in the month, and (ii) swapped out a “Big-5” Canadian bank in favour of Laurentian Bank (LB, see related HBG Insight), which reduced the fund’s exposure to one of the most important near-term credit risks facing global banks: energy lending. In absence of a significant recovery in the price of oil, it appears likely that the Canadian banks are entering a mild credit cycle; this could place downward pressure on estimates, which are already low. At the beginning of April, Big-6 consensus estimates reflect average EPS growth of 1.0% and 4.4% for 2016 and 2017, respectively. History suggests analysts typically underestimate credit deterioration, meaning during periods of rising loan losses, there is an increased risk of downward earnings revisions.

Note: Comments, charts and opinions offered in this commentary are produced by Hamilton Capital and are for information purposes only. They should not be considered as advice to purchase or to sell mentioned securities. Any information offered is believed to be accurate, but is not guaranteed.