2 Bank Stocks I’d Buy Instead of a Bank ETF

Consider investing in these two bank stocks instead of a bank ETF to potentially generate market-beating returns.

| More on:

Beating the TSX might seem like a challenge as a stock market investor, but it is not impossible. 2021 was a year that saw the financials sector perform well and drive growth for the S&P/TSX Composite Index. It is likely the banking sector will continue outpacing the growth of the broader market. Taking a disciplined approach to investing in the top financial institutions could help you beat the broader markets.

Investing in ETFs (exchange-traded funds) can be an excellent way to diversify your investment capital across a group of stocks instead of purchasing individual shares in different companies. However, investing in individual securities could provide you with superior investment returns if you choose the right stocks to beat the returns of the stocks held within a fund.

Today, I will give you a quick look over the top banking ETF you could consider for exposure to the banking sector and two TSX bank stocks that might offer better returns than investing in the fund.

Invest in the Big Six Canadian banks

BMO Equal Weight Bank Index ETF (TSX:ZEB) is a top ETF to consider if you want to bet on the top performers in Canada’s financial industry. The fund seeks to provide you with investment returns by replicating the performance of the Solactive Equal Weight Canada Banks Index. The fund’s constituent securities comprise the Big Six Canadian bank stocks in an equal weighting.

Investing in ZEB ETF means investing in the performance of all six of the top financial institutions in the country in the form of a single investment product. While that makes investing in the top six a more convenient affair, you could miss out on returns if one stock outperforms the rest by a substantial margin.

National Bank of Canada

National Bank of Canada (TSX:NA) is one of Canada’s Big Six banks but does not come close to most of its peers among the top Canadian financial institutions. The $33.62 billion market capitalization bank headquartered in Montreal might be the smallest among the top banks, but that could be the reason why it might outpace ZEB ETF’s returns.

National Bank is an underdog but boasts possibly higher growth potential than its peers as it continues to expand its operations. Trading for $99.43 per share at writing, National Bank stock boasts a juicy 3.50% dividend yield. As the bank becomes less regional, it could provide more stellar growth than its peers in the Big Six.

Toronto-Dominion Bank

Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is one of the bigger players among the top Canadian banks. The $185.41 billion market capitalization bank headquartered in Toronto is another bank stock that might be a better buy if you seek to outperform ZEB ETF. TD Bank stock stands to benefit significantly during rising interest rates because of its retail exposure.

Higher rates would mean better profit margins for the bank, and that could be reflected with a performance that outpaces its peers among the Big Six banks. At writing, TD Bank stock is trading for $101.76 per share, and it boasts a 3.50% dividend yield.

Foolish takeaway

The road ahead is still riddled with uncertainty for stock market investors. It remains to be seen how rising inflation and higher interest rates will impact the stock market. 2021 saw the banking sector put up a stellar performance despite pandemic-related challenges. Looking forward, it will likely deliver market-beating returns.

You can invest in ZEB ETF to bet on all six big banks. But it may be possible to enjoy even greater returns on your investment by narrowing your focus to the two bank stocks likeliest to outperform their peers in the Big Six.

TD Bank stock and National Bank of Canada stock could be well-positioned to provide you with such returns.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

More on Dividend Stocks

A meter measures energy use.
Dividend Stocks

Is Fortis Stock a Buy, Sell, or Hold for 2025?

Fortis has increased its dividend annually for the past five decades.

Read more »

analyze data
Dividend Stocks

3 Dividend Stocks That Are Screaming Buys in November

Here are three top dividend stocks long-term investors won't want to ignore during this part of the market cycle.

Read more »

senior relaxes in hammock with e-book
Dividend Stocks

Generate $175/Month in Passive Income With a $30,000 Investment

Dividend aristocrats offer reliability, and many of them also offer generous yields. With sizable enough discounts, these yields can become…

Read more »

dividends can compound over time
Dividend Stocks

Best Dividend Stocks to Buy Now for Canadian Investors

These three stocks would be excellent additions to your portfolios, given their solid underlying businesses, consistent dividend growth, and healthy…

Read more »

data analyze research
Dividend Stocks

3 Undervalued Stocks to Watch in November

Not all undervalued and discounted stocks are destined or poised to make a comeback soon, and a protracted timeline can…

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

The Perfect TFSA Stocks for Long-Term Growth

Two industry heavyweights are perfect stock holdings in a TFSA for long-term money growth.

Read more »

Make a choice, path to success, sign
Dividend Stocks

Is Fortis Stock a Buy for its Dividend Yield?

Fortis has increased the dividend for 51 consecutive years.

Read more »

Middle aged man drinks coffee
Dividend Stocks

Is Brookfield Stock a Buy, Sell, or Hold for 2025?

BAM stock recently jumped after beating earnings. But is it still a buy, or is it better to wait?

Read more »