1 Bank Stock vs. 1 Bank ETF: Which Should You Choose?

The banking industry is a terrific place to park your funds for significant long-term wealth growth.

| More on:

Stock market investors who want to generate market-beating returns might find it challenging during volatile market conditions. However, making sound investment decisions after studying the trends impacting the market’s performance to outpace the broader market’s growth with your investments is possible.

2021 saw the financial and energy sectors put up a stellar performance, driving growth for the S&P/TSX Composite Index. With the anticipation of interest rates hikes coming in sometime this year, stocks in the financial sector will likely see another boost. It might be the right time to allocate more of your investment capital to investments in the industry to add the potential of market-beating returns to your portfolio.

The question is, should you take a narrow approach or diversify your capital through bank-focused exchange-traded funds (ETFs)?

Today, I will discuss one bank stock and one bank ETF to help you make a more well-informed investment decision.

Investing in the Big Six Canadian banks

BMO Equal Weight Bank Index ETF (TSX:ZEB) is a fund that provides you with investment returns by tracking the performance of the Solactive Equal Weight Canada Banks Index before fees and expenses. The fund invests in and holds the securities that comprise its benchmark index in the same proportion as they are reflected in the index.

Investing in BMO ZEB ETF means investing in the performance of an equal weighting in the Big Six Canadian banks. The fund allocates the same amount of its assets to each constituent security.

Investing in one of the Big Six

Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) is one of the Big Six banks in ZEB ETF’s holdings. The $113.30 billion market capitalization bank stock is the third-largest bank by deposits and market capitalization, and it boasts immense growth potential. Scotiabank’s strong domestic operations pair with its expanding presence in the Pacific Alliance trade bloc countries.

Mexico, Peru, Chile, and Columbia have an alliance charged with increasing trade and eliminating tariffs. Scotiabank’s strong presence in these countries has made it the preferred lender throughout the trade bloc, leading to a surge in earnings and the potential for at least a decade of more solid growth.

Foolish takeaway

The Bank of Canada has said that it might need to introduce interest rate hikes to contend with the inflationary environment. There has been no official announcement concerning when it will happen and by how much. However, we’ll likely see it happen within this year, and that might come with a boost for the financial sector.

Deciding on whether to go for an individual bank stock or an ETF that tracks the performance of the top six might seem like a confusing decision.

At writing, Scotiabank stock trades for $93.20 per share, and it is up by 31.79% in the last 12 months. It also boasts a juicy 4.29% dividend yield that the bank stock disburses every quarter. BMO ZEB ETF is up by 42.77% in the same period, and it boasts an annualized distribution yield of 3.41% that the fund manager pays out each month.

By the looks of things, ZEB ETF seems like the more appropriate investment to consider between the two to get market-beating returns on your investment.

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 recommends BANK OF NOVA SCOTIA.

More on Dividend Stocks

Canadian Dollars bills
Dividend Stocks

3 Monthly-Paying Dividend Stocks to Boost Your Passive Income

Given their healthy cash flows and high yields, these three monthly-paying dividend stocks could boost your passive income.

Read more »

Make a choice, path to success, sign
Dividend Stocks

The TFSA Blueprint to Generate $3,695.48 in Yearly Passive Income

The blueprint to generate yearly passive income in a TFSA is to maximize the contribution limits.

Read more »

hand stacks coins
Dividend Stocks

3 Ultra-High-Yield Dividend Stocks You Can Buy and Hold for a Decade

These three high-yield dividend stocks still have some work to do, but each are in steady areas that are only…

Read more »

senior man and woman stretch their legs on yoga mats outside
Dividend Stocks

TFSA: 2 Canadian Stocks to Buy and Hold Forever

Here are 2 TFSA-worthy Canadian stocks. Which one is a good buy for your TFSA today?

Read more »

calculate and analyze stock
Dividend Stocks

This 5.5% Dividend Stock Pays Cash Every Single Month!

This REIT may offer monthly dividends, but don't forget about the potential returns in the growth industry its involved with.

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

How to Use Your TFSA to Earn up to $6,000 Per Year in Tax-Free Passive Income

A high return doesn't mean you have to make a high investment -- or a risky one -- especially with…

Read more »

path road success business
Dividend Stocks

2 High-Yield Dividend Stocks to Buy Hand Over Fist and 1 to Avoid

High yields are great and all, but only if returns come with them. And while two of these might, another…

Read more »

Man holds Canadian dollars in differing amounts
Dividend Stocks

This 7% Dividend Stock Pays Cash Every Month

A high dividend yield isn't everything. But when it pays out each month and offers this stability, it's worth considering!

Read more »