Earlier this year, I had decided I wanted to do a bit of leveraged investing using my Home Equity Line of Credit. It’s not for the faint of heart, but it can be an extremely effective tool for building your wealth under the right circumstances. After some extensive research, I finally landed on an ETF called the Hamilton Enhanced Canadian Bank ETF (ticker symbol HCAL). It’s a relatively new ETF (launched in Oct 2020) with a ton of promise. Here’s why I was a fan of it for my leveraged investment.
Underlying Investments
HCAL’s underlying holdings are the big 5 Canadian banks – that’s RBC, TD, Scotiabank, CIBC and BMO – plus National Bank. All six of these institutions pay a quarterly dividend, and all of them have outstanding track records of maintaining their dividends even when times get tough. That includes through the pandemic, through the 2008 global financial crisis, and through the dot-com bust of the early 2000s.
Canada’s banks are some of the most tightly-regulated, well-managed banks out of anywhere in the world, and as a result, I was willing to trust them with a substantial share of my and my wife’s nest egg.
Monthly Dividends
While the individual banks pay out dividends quarterly, HCAL pays the dividends out monthly. This is helpful for me, because I borrowed the equity from my home in order to invest. I pay $300 in interest each month to maintain the loan… but my investment pays me $900 in dividends each month. So netted out, I end up with an extra $600 in my pocket, which I invest right back into the ETF.
Beneficial Taxation
Because the monthly distributions are classified as dividend income, they receive preferential tax treatment, versus the kind of income paid out by a bond fund, for example. This is important, because this investment is held in a taxable account for me. I don’t want taxes to be eating into the monthly gains!
Another huge benefit of this approach is that, when you borrow to invest in a taxable account, the interest you pay is tax deductible. That means that I’ll get a portion of the $300 I’m shelling out each month back when tax time comes around. It doesn’t get any better than that!
Mean Reversion
HCAL does a couple of really interesting things, the first of which is something called mean reversion. This is just a fancy way of saying that, each month, the ETF automatically sells off whatever bank stocks performed best throughout the month, and buys more of whichever ones performed the worst.
The rationale here is that, over time, all of Canada’s biggest banks wind up doing really well. Some will lag, and some will pull ahead, but they always come back to a baseline level of performance. This approach means that the ETF is essentially trying to buy low and sell high, each and every month.
It’s a little more frequent than I’d like (quarterly feels like it would be a better balance to me), but I like the spirit of what they’re trying to achieve with the fund.
Modest Leverage
The other interesting thing about the fund is that it uses 25% leverage to beef up the return and dividend. I like this, because Canada’s banks are much more stable than many other banks around the world, as I mentioned before. It’s true that the leverage will magnify both gains and losses, but given Canada’s banks average over a 10% annualized return, it’s a risk I’m willing to take.
And yes, I realize that I’m using borrowed money to invest in a fund that also borrows within itself. It’s risky, and I’m not recommending the strategy for everyone – just sharing the strategy I’ve chosen for myself.
By the way – if you can’t stomach the leverage, Hamilton also offers a non-leveraged version of the exact same fund – ticker symbol HCA. You should also consider straight index fund investing – here’s a post I wrote about how you can beat the market that way.
Performance to Date
Overall, I’m really happy with the way the fund has performed over the past 6 months. Overall, the banks have returned an average of around 23% over the past six month, including dividends. HCAL has delivered around 25.5%, even after management fees are deducted.
Beating the TSX – which returned just over 12% over the same period – is great. Beating Canada’s Big 6 banks is absolutely incredible, since they usually beat the TSX on average anyway. It’s not 25% better like you might expect it to be, given the leverage – perhaps the mean reversion piece hasn’t worked so well just yet. But overall, it’s still a fantastic return that anyone would be crazy to complain about.
Wrapping it Up
I’m no financial advisor… but I know a good opportunity when I see it. HCAL presents a fantastic opportunity to grow your wealth over the long term. Based on what I’ve seen so far, I plan to make it a staple of both my wealth-building and my retirement portfolio. Give it a look – maybe it’s right for you too!
