These 2 Simple Index Funds Could Turn $1,000 a Month Into $14,400

BMO Equal Weight Banks ETF (TSX:ZEB) offers significant income potential.

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Are you looking to turn a little income into a lot of returns with exchange-traded funds (ETFs)?

If so, index ETFs are the way to go. Although actively managed ETFs sometimes deliver high returns, they don’t always keep up the performance for long periods of time. Index ETFs, with their lower fees and greater diversification, usually do. In this article, I will explore two Canadian ETFs that could turn a year’s worth of $1,000 monthly investments into $14,400 over time.

Equal weight banks

BMO Equal Weight Banks ETF (TSX:ZEB) is a Canadian bank ETF that invests in Canada’s Big Six banks. If you are familiar with the Big Six, you can probably guess that this fund’s yield is fairly high. The fund pays out a distribution of about $0.14 per unit per month or $1.68 per year. At today’s price of $41.85, that $1.68 dividend provides a 4.01% yield.

What makes ZEB worth investing in?

First off, it invests in TSX banks, which are some of the best long-term performers on the TSX index. Past performance doesn’t predict future performance, but there are fundamental reasons for thinking that TSX banks will continue doing well (e.g., Canada having a favourable regulatory environment).

Second, ZEB is an equal-weight fund. That means that all stocks in the fund are held in exactly equal proportion. This quality gives ZEB arguably a greater diversification benefit than a typical fund because no single stock is represented in great concentration.

For what it offers, ZEB is a pretty affordable fund. It has a 0.28% management expense ratio (MER), which means management fees and all other fund expenses combined. With ZEB’s 4.01% distribution yield, you could get $4,010 from a $100,000 position, as the table below shows.

COMPANYRECENT PRICENUMBER OF SHARESDIVIDENDTOTAL PAYOUTFREQUENCY
BMO Equal Weight Banks ETF$41.852,390$0.14 per month ($1.68 per year)$334.60 per month ($4,015 per year).Monthly
BMO Equal Weight Banks passive-income math.

As for how you can turn $1,000 per month into $14,400 with ZEB, let’s figure that out. If you invest $1,000 per month at a 4% yield for a period of one year, you’d end up getting $480 a year in dividends. If you hold the position for 30 years, you’d get $14,400 in dividends plus whatever capital gains the position experiences — assuming that the dividend isn’t cut or increased.

High-yield Canadian stocks

Next up, we have Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX:VDY). This one pays a $0.16 monthly dividend, or $1.92 per year. That provides a 3.84% yield at today’s price of $49.90.

VDY’s yield is pretty close to that of ZEB, and it should provide similar amounts of annual passive income. However, this fund has one advantage over ZEB: more diversification. Unlike ZEB, which only invests in banks, VDY invests in several sectors. These include non-bank financials, energy companies and utilities. VDY’s yield is not quite as high as ZEB’s, but it might be a wiser overall holding due to it holding uncorrelated asset classes. Also, its management expense ratio (0.22%) is a little lower than ZEB’s.

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 Andrew Button has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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