Our Hamilton U.S. Small/Mid-Cap Financials ETF (HUM, HUM.U) was the top performing U.S. financials ETF in Canada – again. HUM has now outperformed its competitor ETFs over the following periods: since inception, in the last two years, full year 2021, and full year 2022. In 2021, it was the top performing financials ETF in Canada – foreign or domestic. In the last two years – which included one large up and one large down year, HUM outperformed every other U.S. financials ETF in Canada by between ~9% and 20%. Since inception, HUM has also outperformed some of the largest U.S. financials ETFs, including XLF, VFH and KBE.
Over the past 20 years, U.S. mid-cap financials have been one of the top performing groups within the global financial sector. Why have the mid-caps performed so well? The main reasons for the long-term outperformance of the U.S. mid-cap financials versus the large-caps are: (i) ongoing consolidation creating efficiencies (and merger premiums), (ii) simpler business models versus their large-cap peers, which have experienced large losses/underperformance from their capital markets/trading platforms, foreign subsidiaries, or in certain loan categories; and (iii) significantly less regulatory risk (as regulators/legislators favour them over the large-caps). In our opinion, these historical drivers of outperformance remain.
Moreover, because the Hamilton U.S. Mid/Small Cap Financials (HUM, HUM.U) is actively managed and the U.S. mid-cap financial sector is so large, we can customize our geographic exposure to higher growth states/regions. Going forward, for HUM, consensus portfolio-weighted EPS growth for the next two years is over 20%, while portfolio-weighted price-to-earnings is 10.2x. The current valuation is very low relative to the 20-year average of 14.4x, meaning a reversion to the historical mean valuation would be highly material to HUM’s returns.
Given its strong historical performance, we continue to believe investors in the U.S. financials should have at least a third of their U.S. financials weighting to the mid-caps, for diversification and growth. We believe investors should consider partially reducing their exposures in large-cap financials ETFs or individual holdings in favour of a weighting in the Hamilton U.S. Small/Mid-Cap Financials ETF which trades under the tickers HUM (CAD) and HUM.U (USD) on the Toronto Stock Exchange.
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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 the bid/ask spread).
Commissions, management fees and expenses all may be associated with an investment in the ETFs. The relevant prospectus contains important detailed information about each ETF. Please read the relevant prospectus before investing. The ETFs are not guaranteed, their values change frequently and past performance may not be repeated.
Certain statements contained in this insight constitute forward-looking information within the meaning of Canadian securities laws. Forward-looking information may relate to a future outlook and anticipated distributions, events or results and may include statements regarding future financial performance. In some cases, forward-looking information can be identified by terms such as “may”, “will”, “should”, “expect”, “anticipate”, “believe”, “intend” or other similar expressions concerning matters that are not historical facts. Actual results may vary from such forward-looking information. Hamilton ETFs undertakes no obligation to update publicly or otherwise revise any forward-looking statement whether as a result of new information, future events or other such factors which affect this information, except as required by law.
 The universe of U.S. financials ETFs in Canada is the following: RUBY, RUBH, ZBK, ZUB, ZWK, CALL, and HUBL.
 Performance since inception measured from June 26, 2020 to December 31, 2022
 Source: Morningstar
 As of December 31, 2022
 Source: Bloomberg, Hamilton ETFs. Large-caps financials are the S5FINL Index.