Ever looked at your big Canadian bank stocks and wished you could own more of them without dipping into your next paycheque? There’s a way to do it. It’s called leverage, and it basically lets you control more of an asset with less money.
Using leverage amplifies both price returns and income. If the underlying stocks go up, you gain even more. If they go down, your losses are magnified. But it also means more dividend income per dollar invested. That’s why yield-seeking investors sometimes use leverage to stretch their capital further, especially when interest rates are low
It’s risky, but if there’s one pocket of the market I’d feel comfortable applying leverage to, it’s the Canadian banking sector. The Big Six banks have long track records of dividend growth, strong profitability, and dominance in their domestic market. If I’m going to juice my exposure to anything, it’s going to be them.
Here’s one exchange-traded fund (ETF) that automates the entire process for you, so you can sit back and collect income like clockwork.
Hamilton Enhanced Canadian Bank ETF (HCAL)
The Hamilton Enhanced Canadian Bank ETF (TSX:HCAL) is a simple but powerful tool for investors looking to supercharge their exposure to Canadian bank stocks.
It tracks the Solactive Equal Weight Canada Banks Index, which means it holds all six major banks in equal proportion. This equal-weight strategy gets rebalanced and reconstituted semi-annually, ensuring no single bank dominates the portfolio and that you’re always buying a balanced basket.
Where HCAL stands out is its use of modest leverage. The ETF borrows to gain 1.25 times exposure to the index – so for every $100 you invest, it controls $125 worth of Canadian bank stocks. That leverage boosts both potential capital appreciation and income.
And speaking of income, HCAL pays a 6.4% yield at the time of writing, with monthly distributions. That’s a lot more consistent and frequent than the quarterly payouts you get from holding individual banks directly.
Why invest in HCAL?
There are a few solid reasons to consider investing in HCAL rather than trying to leverage Canadian bank stocks yourself.
First, using margin to buy individual stocks is tricky. You’d have to manually buy each of the Big Six banks, calculate equal weights, monitor price movements, and rebalance as needed. On top of that, you’re on the hook for margin interest, and if markets fall, you could get hit with a margin call, whereby your broker forces you to sell at a loss or deposit more cash to maintain your position.
HCAL handles all of that for you. It automates the process of rebalancing and applies the leverage internally, with Hamilton benefiting from institutional borrowing rates that are likely better than what retail investors get on margin loans.
Another major advantage? Margin accounts can only be used in taxable, non-registered accounts. HCAL, on the other hand, can be held in a Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP), or First Home Savings Account (FHSA), allowing for tax-free or tax-deferred compounding on both the income and potential price gains.
