# HCB - a new ETF with only 6 bank stocks



## dubmac (Jan 9, 2011)

This caught my eye. A new ETF that holds all 6 big banks only. The fund holds 80% of the 3 lowest performing banks (relative to the mean), and 20% of the other top performing banks. Each month, goes the play book, the fund sells the stocks that improve, and buy the ones that drop. ...something called the "mean reversion strategy with monthly re-balancing". too early to see returns. MER=0.55%.
sellers suggest that this is a good way to make a return in a down trending market.
time will tell


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## james4beach (Nov 15, 2012)

I'm not even sure this would outperform plain old XFN during good times. But I think it could do very badly during a banking crisis.

There is a broad misunderstanding about Canadian bank stocks and bank bailouts. People seem to think that because the government will bail out the banks, that the stocks will do well. Nothing could be further from the truth.

New bailout regulations actually spell out that equity will take the losses if the bank needs to raise more capital or recover from insolvency. Various other instruments can even convert to equity and dilute the equity down.

Imagine that the real estate bull market ends, banks start having losses, and the economy turns down. Banks have deteriorating loans and heavy losses. Let's say for the sake of argument that BMO and National Bank suffer the worst losses, and spiral into a condition they can't recover from. They start recapitalizing and issuing tons of equity. BMO and NA stocks keep plummeting. The ETF keeps selling the winners (the others) and buying more BMO and NA on their way down.

In this hypothetical scenario, eventually BMO and NA have worthless equity, and get amalgamated with other big banks. The ETF would have horrible performance due to increasing their long position on the trip down to worthlessness.

And if you think those failed bank stocks are going to recover given enough time... take a look at Citigroup and Bank of America. The banks still exist, but the stocks have never recovered after 11 years.


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## dubmac (Jan 9, 2011)

james4beach said:


> ... take a look at Citigroup and Bank of America. The banks still exist, but the stocks have never recovered after 11 years.


The reason I'm interested is because I don't invest that way! so I'm curious to see whether that fund will increase, or stay stable, or drop in the current market conditions. 
Given your statement about Citigroup and B of A, true - the stocks have never recovered, but...can you make money from stocks like these? I mean, bank stocks will go up and down - but I don't sell them. I buy and hold.
I consider this fund a kind of weird example to watch n' see what happens over time.
should be interesting.

PS: Regarding BMO - that bank was founded in 1817. If it hasn't imploded, exploded or been amalgamated by now, I don't it ever will!


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## agent99 (Sep 11, 2013)

Seems like a good idea to me. Anyone who has been around for a while would know that the Canadian banks are in a sort of horse race. One sticks it's head out in front and then the others try and catch up. Competition is a good thing. In the end all 6 banks gain from it. 

I hold all six banks. Trading them to just hold the lesser performing ones would not be easy for an individual. And the trading costs might be more than the MER of the etf? And there would be capital gains and losses. 

We already hold too much in the banks, but might see if there is a place for this in registered accounts. Maybe sell individual banks and buy this.

I think the ETF may do better than holding a basket of the 6 banks with no trading. That is no doubt it's intent.


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## My Own Advisor (Sep 24, 2012)

Crazy investors might pay 0.55% MER to own something they could own directly - 6 bank stocks. I own all these banks as do most Canadians in a low-cost ETF like XIU, ZCN, VCN or as a DIY investor.


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## Pluto (Sep 12, 2013)

This could become one of the more popular bank etfs. Apparently they have done their research on their strategy. Back testing reportedly shows better performance than just holding individual banks. time will tell.


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## agent99 (Sep 11, 2013)

My Own Advisor said:


> Crazy investors might pay 0.55% MER to own something they could own directly - 6 bank stocks. I own all these banks as do most Canadians in a low-cost ETF like XIU, ZCN, VCN or as a DIY investor.


But do you rebalance bank holdings on a regular basis? Rebalancing regularly is the whole point of the etf. It's not just owning the banks as most of us already do.

If done monthly, you could require as many as 12 trades per month ($120 or $1440pa) while keeping close tabs on what the banks are doing. The etf would cost $55 pa for a $10,000 amount and they keep track of the bank performances. You could only trade ~5 times a year for that.



> This could become one of the more popular bank etfs. Apparently they have done their research on their strategy. Back testing reportedly shows better performance than just holding individual banks. time will tell.


True. How much better performance will etf produce after MER costs compared with just holding a basket of bank stocks? Certainly better than trying to do the rebalancing yourself.


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## james4beach (Nov 15, 2012)

agent99 said:


> True. How much better performance will etf produce after MER costs compared with just holding a basket of bank stocks? Certainly better than trying to do the rebalancing yourself.


I don't even understand where the demand for this ETF comes from. Are there people out there who say "I need more bank stocks"? The TSX index is already overweight financials. Are people actually adding _more_?


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## dubmac (Jan 9, 2011)

james4beach said:


> I don't even understand where the demand for this ETF comes from. Are there people out there who say "I need more bank stocks"? The TSX index is already overweight financials. Are people actually adding _more_?


good question. 
I suspect that those who own (most investors) bank stocks have seen these investments plateau over the past 3 months. Will stocks increase over the next few years, or will they go up and down across a mean? If they go up and down, or even trend down, the plan should work. But there are limits, I suspect (ie: when do they stop going down, and then start trending up?). That is where any wisdom from me stops.
Happy thanksgiving all. eat up.


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## agent99 (Sep 11, 2013)

james4beach said:


> I don't even understand where the demand for this ETF comes from. Are there people out there who say "I need more bank stocks"? The TSX index is already overweight financials. Are people actually adding _more_?


James, You should go read up on the purpose of this ETF. It is intended to be a higher yielding method of holding banks as compared with just holding a basket of the banks themselves. You need to go read and understand how that is achieved. Once this etf is better established, I may very well sell the banks I own in registered accounts and replace them with this etf.

Maybe this link will help explain the mean reversion strategy to be used: 

http://www.hamilton-capital.com/etf/hcb/# 

Scroll down and click on the link below HCB Manager Commentary.


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## james4beach (Nov 15, 2012)

Correct me if I'm wrong, but their strategy assumes that none of these equities will go to zero, right?


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## Pluto (Sep 12, 2013)

^
Anything is possible. Its possible all stocks could go to zero. I just don't find it very likely. I'll watch this etf, and I get the feeling, after watching, I'll be tempted to buy some. Just need to kick the tires for awhile first.


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## dubmac (Jan 9, 2011)

Pluto said:


> ^
> Anything is possible. Its possible all stocks could go to zero. I just don't find it very likely. I'll watch this etf, and I get the feeling, after watching, I'll be tempted to buy some. Just need to kick the tires for awhile first.


I agree. I'd like to see the back-test work that was done to determine the funds viability, or profitability.
Also - if stocks haven't hit "zero" yet - especially bank stocks - which are among the most durable - I doubt that they ever will. If they do - we would be in a very different world than the one we are now.


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## james4beach (Nov 15, 2012)

dubmac said:


> Also - if stocks haven't hit "zero" yet - especially bank stocks - which are among the most durable - I doubt that they ever will. If they do - we would be in a very different world than the one we are now.


Laws and banking regulations in Canada have changed. The government has been very clear on the new bail-in legislation: if banks have trouble with their capital, equity will eat the losses. The government has done their part to vocalize this. If investors don't listen, it's their own fault.

The government also started preventing giant bank mergers starting in the 1990s. Both the RBC/BMO merger and CIBC/TD mergers were blocked. In other words we've probably amalgamated the banks as much as we're going to. So this isn't like all the decades that preceded it, when slightly troubled banks would get rolled into bigger banks, and the banks kept merging and rolling into larger entities.

Over 100+ years we've whittled down from hundreds of big banks down to tens, and now down to 6. I don't think the 100+ year history and equity behaviour is going to be representative of what happens going forward. In other words, this is a different picture than 1867 - 1980.

More importantly, and much more recent:

Additionally, CIBC and I believe BNS equity value (meaning shareholder equity in their financial statements) dropped near zero at one time during the financial crisis. Yes I realize the stocks traded above that value, but that misses the point. Just 10 years ago, we came *within a hair* of seeing equity totally wiped out in at least one of the big Canadian banks.


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## jargey3000 (Jan 25, 2011)

what does it meanwhen business executives or analysrs, or whatever, talk about "organic growth" in a company?
what the heck does that mean?


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## agent99 (Sep 11, 2013)

Pluto said:


> ^
> Anything is possible. Its possible all stocks could go to zero. I just don't find it very likely. I'll watch this etf, and I get the feeling, after watching, I'll be tempted to buy some. Just need to kick the tires for awhile first.


I agree. It's too new for me to jump in right now. However, the concept is good and in fact nothing new. It's been discussed for years. I don't subscribe to Mottley Fool, but they had an article on the banks a while back:
https://www.fool.ca/special-free-report/what-every-bank-shareholder-must-know/

and this is an excerpt:



> The point for investors: What does all this mean for bank stocks?
> The Canadian banking industry can be summed up by four simple words: reversion to the mean. In other words, if a bank has a bad year, it’s not particularly difficult to recover. And if a bank enjoys a fantastic year, it often ends up coming back to earth as competitors catch up.
> 
> In fact, some commentators have advocated a very simple strategy for investing in Canadian banks: Every year on January 1, simply buy the bank stock that performed the worst the previous year. Then repeat that step every 12 months. That strategy would have returned 17% per year from January 1, 2004, to December 31, 2013, without even including dividends. The comparable number for the iShares S&P/TSX Capped Financials Index is only 8% per year.
> ...


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## agent99 (Sep 11, 2013)

jargey3000 said:


> what does it meanwhen business executives or analysrs, or whatever, talk about "organic growth" in a company?
> what the heck does that mean?


Jargey, It means growth within the company's existing structure. For example, increase in sales or production, increase in number of customers, higher productivity of employees or machine, etc. Inorganic growth would be more like acquisition of other companies or merging with another company.


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## jargey3000 (Jan 25, 2011)

thanks 99
(BTW -i somehow posted this on the wrong thread...hahaha)


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