Monthly income investors often assume higher yield means higher risk — but the structure of the ETF matters more than the banks themselves.
These three Canadian bank ETFs all hold the same core stocks, rebalance the same way, and pay monthly distributions. Yet their income ranges from under 3% to nearly 13%. The difference isn’t the banks. It’s how the cash flow is engineered.
ETF Ladder From Simple to Aggressive
Three ETFs offer the same core Canadian bank exposure but very different income and risk outcomes. The funds are BMO Equal Weight Banks Index ETF TSX ZEB, Hamilton Enhanced Canadian Bank ETF TSX HCAL, and Global X Enhanced Equal Weight Canadian Banks Covered Call ETF TSX BKCL. Each ETF pays monthly distributions and follows an equal-weight bank approach. The difference comes from whether the ETF uses leverage or sells covered calls to boost yield.
ZEB provides plain vanilla equal-weight exposure to the six largest Canadian banks. The ETF trims positions at rebalance so each bank is about 16.5 percent of the fund. The underlying banks pay dividends quarterly. ZEB converts that income into monthly distributions. The fund charges a 0.28 percent expense ratio and delivers an annualized distribution yield of about 2.9 percent. Over the past ten years, ZEB has produced an annualized total return of nearly 15 percent.
HCAL follows the same equal-weight bank index as ZEB but adds 1.25 times leverage. For every 100 dollars invested, the fund borrows an additional 25 dollars to increase exposure. That leverage raises both dividend income and price volatility. Borrowing costs are passed on to investors and increase expenses. HCAL yields about 4.2 percent on an annualized basis and pays monthly. In rallies, leverage can boost returns. In downturns, losses are magnified.
BKCL pairs 1.25 times leverage with covered call option writing on its bank holdings. Selling calls generates option premium income and increases monthly cash flow. Writing calls also caps upside when banks rally. The combined approach mutes price appreciation and raises downside sensitivity. BKCL delivers a much higher annualized yield of 12.7 percent. Fees are materially higher with a 1.7 percent management expense ratio plus a 0.27 percent trading expense ratio. That ETF is an income-first product rather than a growth vehicle.
What Investors Must Accept
Boosted yield is not free. Leverage amplifies gains and losses. Covered calls produce premium income and limit upside potential. Higher fees and borrowing costs lower net returns. Each ETF preserves the same bank exposure while shifting the risk and reward balance. Choose ZEB for simplicity and lower cost. Choose HCAL for higher income and more volatility. Choose BKCL if maximizing monthly cash is the priority and capped upside is acceptable.
All three ETFs pay monthly distributions and follow an equal-weight Canadian bank index. The yield ladder runs roughly from 2.9 percent with ZEB to 4.2 percent with HCAL to 12.7 percent with BKCL. The income increase comes with higher fees, capped upside, or greater downside risk, depending on the ETF. Investors should match fund choice to income needs, fee sensitivity, and risk tolerance.
The key takeaway is simple: higher monthly income is engineered, not free.
Investors chasing yield without understanding leverage and option strategies often discover the risk too late. Choosing the right bank ETF depends less on the dividend headline and more on how that income is produced.
