All Canadian bank investors know that the sector has experienced very good performance over the past ten to fifteen years. However, most are less familiar with Australia, which actually has a history of long-term outperformance relative to the Canadian financials, with virtually identical volatility. Interestingly, as a testament to the strength of the Australian financial sector, its banks even outperformed the Canadian banks during the global financial crisis (see our related Insight “Australian Banks Outperformed Canadian Banks During the Global Financial Crisis”).
There are tremendous similarities between the Canadian and Australian financial sectors; however, one key difference for income-focused investors is that Australian financials have much higher dividend payout ratios and dividend yields. The main reason is that, unlike the Canadian financials, the Australian financials are not aggressively attempting to build foreign platforms through acquisitions. Rather, they are returning capital to shareholders, mostly in the form of dividends.
This capital return-emphasis is evident in the chart below. It highlights that not only have the Australian financials outperformed the Canadian financials in the past ten and fifteen years, the composition of returns has been heavily skewed toward dividends, while the Canadian financials returns are skewed to capital appreciation1.
An important factor in the Australian financials’ long-term outperformance versus the Canadian financials is the resiliency of the Australian economy which has consistently achieved higher GDP growth than the Canadian economy (GDP per capita is also notably higher). This trend is expected to continue into 2019, with Australia forecast to be the fastest growing ‘large’ developed economy (at 2.8%)2.
The Hamilton Capital Australian Financials ETF (HFA) pays monthly distributions, and invests in Australian financials, one of the world’s strongest financial sectors. HFA seeks to generate a yield of 6.5% or higher, aided by covered calls.
The Hamilton Capital Canadian Bank Variable-Weight ETF (HCB) pays monthly distributions and invests in in the Big-6 Canadian banks. HCB seeks to capitalize on one of the most popular themes in Canadian bank investing – mean reversion – by rebalancing each month to overweight the 3 recent underperforming banks to 80% and underweight the 3 recent outperformers to 20%. Its current yield is 3.5%3.
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.