For the quarter ended December 31, 2019, the Hamilton Global Financials Yield ETF (HFY) returned 4.1% including distributions. In 2019, HFY returned 21.6%, beating the Canadian banks by 750 bps. It also beat its benchmark, the KBW Financial Sector Dividend Yield Total Return Index (in CAD), which returned 15.0%.
HFY is also coming off a strong two years where markets and the financial sector both experienced one large down year (2018) and one large up year (2019). Over this period HFY outperformed both the Canadian banks and global financials by ~400 bps each. It is also worth noting that HFY’s maximum monthly drawdown was in line with lower beta financial sectors like the Canadian and Australian financials.
With its favourable mix of yield, strong forecast EPS growth and low correlations, HFY, in our view, remains an attractive complement to investors seeking to add diversification to their core Canadian bank/financials holdings. Its current yield is 3.8% and forecast EPS growth for 2020 and 2021 is strong at 8.6% and 7.9%, respectively (materially higher than that of the Canadian banks).
Global financials outlook improved in Q4
The investing backdrop for global financial stocks has brightened since the summer doldrums, supported by progress in U.S.-China trade talks and improved Brexit clarity following a majority victory for the incumbent U.K. Conservatives. On the rates front, although the U.S. yield curve inverted briefly in late August/early September, it had steepened to 37 bps by the year-end (aided by a falling Fed Funds rate) as the market became more optimistic for the global economy. The forward curve is now forecast to steepen further by year-end, which would be bullish for much of the U.S. financial sector.
Policy effectiveness determined winners and laggards
In Q4, among HFY’s over 50 holdings, the global private equity managers – Apollo and Carlyle, followed by Indian bank ICICI were top portfolio contributors. Apollo and Carlyle remain beneficiaries of a secular shift globally to alternate assets. In addition, robust financial markets boosted the outlook for portfolio realizations and investing in Q4. Surprise corporate tax rate cuts in India along with continued expectations of credit quality improvement drove strong performance during the quarter for all Indian bank positions (including ICICI).
Australian banks – Westpac and NAB – along with Chilean bank Banco Santander weighed on the portfolio results. After a very strong 9 months of performance, Australian banks faced renewed regulatory scrutiny in Q4, which weighed on bank stocks in the quarter. In Chile, social unrest gained force in Q4 and is expected to impact the country’s economic outlook negatively.
Favourable Outlook for financials supported by cyclical and secular factors
The macro outlook for the global financial sector remains positive, supported by multiple tailwinds most notably: (i) forecast global GDP growth of over 3%, (ii) an expected steepening of the U.S. yield curve, and (iii) an ease in global trade tensions. Moreover, the operating fundamentals of the global financial sector remain positive including stable top-line growth, a benign credit cycle, robust financial markets and strong industry balance sheets.
In 2020, we expect continued positive momentum for HFY driven by its exposure to a diverse mix of cyclical and secular investment themes across the banking, insurance and exchange sectors. A slowdown in global economic growth and global policy uncertainty from 2020 US Presidential elections are key risks for global financials and Hamilton Global Financials Yield ETF (HFY).
Notes from India: All is Well in the World’s Fastest Growing Market (January 20, 2020)
A Day in the Life of the U.S. Financials – Notes from New York (October 2, 2019)
HFY: Thriving in a Very Challenging Market (Supported by 4% Yield) (September 9, 2019)
HBG/HFY Outperforming Almost Everything (in a Sea of Red) (October 15, 2018)
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.
 Canadian banks represented by the S&P TSX Composite Diversified Banks Total Return Index
 From December 29, 2017 to December 31, 2019; global financials represented by the S&P Global 1200 Financials Index (total return)
 As measured by the difference between the U.S 10-year treasury and the Fed Funds effective rate.