On June 29, 2020, the Hamilton Global Financials ETF will begin trading on the TSX under the ticker HFG. This new ETF will have a lower management fee and will be the result of a merger between the Hamilton Global Bank ETF (HBG) and the Hamilton Global Financials Yield ETF (HFY) – both of which have experienced material outperformance.

Since its launch in January 2016, the Hamilton Global Bank ETF has outperformed the KBW Nasdaq Global Bank Net Total Return Index (GBKXN-in CAD) by over 10%. Even more significant was the outperformance of the Hamilton Global Financials Yield ETF, which, since its launch in February 2017, outperformed the KBW Nasdaq Financial Sector Dividend Yield Total Return Index (KDXTR-in CAD) by over 20%. Importantly, HFY has performed very well in market corrections, and especially during the recent severe pandemic-related correction that began mid-February. Since then, HFY was the top performing financials ETF in Canada, declining less than the four largest Canadian banks/financials ETFs, and significantly less than ETFs with global financials exposure, especially those with United States[1] exposure.

We expect the most important difference between Hamilton Global Financials ETF (HFG) and its financials predecessor Hamilton Global Financials Yield ETF (HFY) will be the greater balance between growth and yield (HFY skewed more toward yield, as implied by its name). That said, we anticipate that HFG will have a yield of ~3%. With the post-pandemic interest rate environment likely to result in interest rates remaining “lower for longer”, we anticipate that HFG will have a higher weighting in financials benefiting from secular trends (payments, exchanges, certain wealth managers), while holding relatively less exposure to those financials negatively impacted by depressed long rates and the current credit environment (i.e., life insurers, and other financials with long duration assets).

Importantly, we believe this expanded universe (with more growth, less constraint on yield) will provide several benefits to unitholders including: (i) higher portfolio-weighted EPS growth, (ii) higher portfolio-weighted ROE, and (iii) superior diversification and lower volatility.  

Notes

[1] Excluding ETFs with assets under management less than $15 mln.

Related Insights:

Hamilton ETFs Launches Hamilton Financials Innovation ETF (June 1, 2020)

Canadian Banks: Three Vulnerable Loan Categories in Charts (May 15, 2020)

One Chart: Australia Appears to be Flattening the Curve Ahead of Other Countries (April 2, 2020)

Financials: Does COVID-19 Represent a Growth Scare, Credit Event or Crisis? (March 25, 2020)

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.