In 2022, our blue-chip Hamilton Australian Banks Equal Weight Index ETF (HBA) outperformed its 38 competitor financials ETFs, by rising ~1%, making it the top performing financials ETF in Canada – foreign or domestic[1]. This is the second year in a row that Hamilton ETFs had the top performing financials ETF in Canada[2]. In fact, HBA – which has a yield of 5.8% – was the only financials ETF in Canada to post a positive return in 2022. HBA is 100% currency hedged, so the volatility of the AUD/CAD did not influence investor returns.

HBA was also the top performing financials ETF in Canada for the last two years, rising 32.4%, outperforming the Canadian banks by over 6%[3]. Since inception, HBA has an annualized return of 20.3% – also ahead of the Canadian banks[4]

Why should Canadian financials investors consider HBA? Australia is one of the most successful developed economies in the world, is wealthier than Canada, and typically has higher GDP growth. It also has one of the best and strongest banking sectors globally (~40% higher capital levels than Canadian banks). In our view, there are no two countries and banking sectors more similar than Canada and Australia and in the last 25 years, the Australian banks have a nearly identical return/volatility profile to the Canadian banks – but are not meaningfully correlated.

The lower correlations mean that historically, an investor with a mix of Canadian and Australian banks generated higher returns with lower volatility than an investor with only Canadian or Australian banks. We wrote about the benefits of owning both sectors in our Insight “Australian Banks: Outperformance vs Canada (akin to Canadian Bank #4)” (July 2020). Heading into 2023, we believe there are five reasons to consider taking or adding a position in the top performing HBA.

First, the economy in Australia is faring better than its global counterparts, and the country is forecast to lead developed economies in GDP growth at 1.8% in 2023 and 1.6% in 2024[5]. Central bank rates are poised to peak at 3.9% or ~65 basis points lower than Canada’s[6]. It follows that recession risk is lower than Canada and the United States, in part because fiscal policy and monetary policy in Australia are not operating at cross purposes to the same degree as other countries – namely large fiscal expenditures are creating inflationary pressures causing central banks to raise rates more and faster than they otherwise would.

Second, Australian banks are benefiting from margin expansion, which is expected to remain a revenue tailwind. Like Canada, the banking sector in Australia is an oligopoly dominated by very large banks. As a result, pricing discipline in an environment of rising rates has contributed to margin expansion which supported strong operating results in the last reporting period. Relative to Canadian banks, the Australian banks generate a higher percentage of their gross revenues from net interest income, so rising margins should have a greater impact on earnings (assuming price discipline).

Third, capital pressure is significantly less for the Australian banks, as their core capital ratios are ~40% higher than Canadian banks. APRA, the Australian Prudential Regulatory Authority, began raising capital requirements beyond Basel 3 requirements in 2017, in order to achieve ‘unquestionably strong’ capital levels in comparison to global peers. The current economic environment in Canada has created some additional “capital risk” to the Canadian banks, including the surprise increase in the domestic stability buffer, which was the catalyst for BMO’s recent equity raise.

Fourth, risk of falling home prices appears lower in Australia than Canada. In the last 10 years, home prices in Canada have risen 50% more than Australia[7]. Beginning in 2016 – coincident with the regulator requiring a large increase in bank capital – home prices in Australia went nearly 5 years without rising (2015-2019), while Canadian home prices continued to rise meaningfully. The regulators in Australia also enacted a myriad of measures to limit the risk to banks from falling home prices. These measures included raising the serviceability ‘stress’ test numerous times, and tightening lending standards across virtually every area and category of lender/property (which are too numerous to list). As a result, we believe the risk to banks from falling home is notably lower in Australia than Canada.

Fifth, Australia’s fiscal prudence strengthens its position in periods of economic uncertainty. For example, entering COVID, Australia was in much better fiscal condition than Canada, with a debt-to-GDP ratio of less than half of Canada – a difference which has widened further. We believe its superior fiscal situation increases the probability that Australia can sustain a more pro-growth fiscal policy as years progress, while other jurisdictions will face ever increasing fiscal challenges as rising rates pressure deficits and debt.

In our view, Australia’s fiscal prudence means it is well positioned to continue to generate higher GDP growth than most developed economies (including Canada). This position combined with the very high-quality banking sector could also mean that going forward, Australia could experience lower macro volatility. In our opinion, Australia is as well positioned as any country to weather the current economic environment and as a result, HBA continues to be an attractive standalone investment or a complement to core Canadian financials positions. It has a yield of 5.8%, paid quarterly.


Recent Insights:

HUM – Top Performing U.S. Financials ETF in Canada – Again | January 9, 2023

HDIV – Outperforms S&P/TSX 60 by 3.7% in 2022 (Adding to SI Outperformance) | January 4, 2023

HFT – Top Performing Fintech ETF by Wide Margin | January 4, 2023

HFG – Top Performing Global Financials ETF in Canada | January 4, 2023

HDIV – Adding HFIN, Selling FLI to Increase Cdn Banks, Remove U.S. Lifecos, Reduce Fees | November 2, 2022

HYLD – Adding JEPI, Selling HBF for Higher Yield, Added Diversification, Lower Fees | October 19, 2022

Market Outlook with Ed Yardeni | October 17, 2022

Get More from Canadian Utilities with Hamilton Enhanced Utilities ETF| September 6, 2022

Canadian Bank CEO Event with RBC & TD | June 9, 2022

Canadian Banks: TD Buys FHN – A Very Strong Fit | May 16, 2022

Canadian Banks: BMO’s High Risk, High(er) Reward Acquisition of BoW | January 27, 2022



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.

[1] In calendar 2022. As measured by CUSIP and excludes 2x/3x daily levered ETFs. There are 36 financials ETFs in Canada as measured by strategy.
[2] In 2021 the Hamilton Mid/Small-Cap U.S. Financials ETF (HUM, HUM.U) was the top performing ETF in Canada, rising 32%. (source: Morningstar, Hamilton ETFs, Bloomberg)
[3] Based on total return from December 31, 2020 to December 30, 2022 (source: Hamilton ETFs, Bloomberg)
[4] Performance since inception measured from June 26, 2020 to December 30, 2022 compared to the S&P/TSX Composite Diversified Banks Total Return Index (STDBNKR) (source: Hamilton ETFs, Bloomberg)
[5] As of January 4, 2023 (source: Hamilton ETFs, Bloomberg)
[6] As of January 4, 2023 (source: Hamilton ETFs, Bloomberg)
[7] Source: Hamilton ETFs, Bank for International Settlements Residential Property Index period ending June 30, 2022.

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