Why You Should Own Global Banks

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Mark Bunting, Publisher, Capital Ideas Research

Canadian investors love their Canadian banks — for good reason.

In January, 1997, for example, 1,000 TD Bank shares were worth $8,700. Today, those shares have a value of nearly $133,000, including reinvested dividends. A neat return of more than 1,500%.

But a case can be made for investors to look beyond their own backyard to complement their Canadian bank holdings with banks from other parts of the world that have superior growth and healthy yields. That’s the opinion of Robert Wessel, managing partner of Hamilton Capital, which distributes two ETFs with exposure to global financials.

The flagship Hamilton Capital Global Bank ETF (HBG-T) outperformed the Global Bank Index in 2016 by 16% with a 28% total return. Hamilton Capital recently launched the Hamilton Capital Global Financials Yield ETF (HFY-T), which it says offers REIT-like yield with positive interest rate sensitivity.

Mr. Wessel believes there’s a place for Canadian banks in investors portfolios pointing to their solid franchises, high profitability, and predictable dividends. But he thinks global financials can be a good complement to the big banks while adding diversification, above average growth and solid yields.

“I think there are strong reasons, particularly related to taxation, not to sell Canadian banks. But is there a powerful case to add diversification alongside Canadian banks, I think the answer to that is very surely yes,” Mr. Wessel says.

Advantages to investing in global financials

“The global financial sector is so gigantic — it has a combined market cap of $10 trillion, give or take,” Mr. Wessel says. “There’s hundreds and hundreds and hundreds of financial companies. You just have the ability with a non-passive and active product to more explicitly find growth so we’re able to customize the portfolio, as large as it is, by finding financials that are growing or they have good operational excellence, or, in part, because they’re taking market share.”

The appeal of U.S. mid-sized banks

One of Mr. Wessel’s largest holdings is First Republic Bank (FRC-N) which offers commercial banking and wealth management in select areas of California, Oregon, New York, Connecticut and Florida.

“We’re looking for areas and companies that are growing faster than their national or regional economy,” he says. “First Republic (FRC-N) is actually a decent sized institution. They do very, very well in the businesses that they target. They’re in good geographies, and they have good demographics in their targeted customer base. They have a wealthier clientele. They execute very well — so guess what — because the U.S. is such a big country, they’ve got lots of room to grow.”

Another stock Mr. Wessel likes is Silicon Valley Bank (SIVB-O), which lends to technology companies, and offers banking to high-net worth individuals. The bank claims on its website that it’s helped fund more than 300 start-ups.

Higher interest rates are coming

Dividend yields are usually an important part of total returns for global financials. Mr. Wessel believes we’re coming into the first sustained period of higher interest rates since the late 1970s, something many investors have never experienced. How should investors, especially those who own real estate investment trusts (REITs), protect their investments while producing growth and yield? That’s where Hamilton Capital’s new ETF (HFY-T) comes into play.

“It aspires to a REIT-like yield, but with positive rate sensitivity, Mr. Wessel says. “The REITs have very low growth and very high valuations, and that’s sustained by the fact that they have very high yields.”

Will REITS underperform the financials?

“It seems very likely the market is about to experience a  three-to-five year period of rising or normalizing rates. Arguably, it’s already started,” he says. “In the last 15 years, REITs have done poorly in periods of rising rates, and could be challenged in the coming years. There’s more than 400 financials globally that have a yield of more than 5%. Our aspiration is to have a REIT-like yield but because the portfolio would respond positively to rising rates, it would seem like an obvious substitute to sell a REIT ETF and buy HFY.”

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