BMO Equal Weight Banks ETF (ZEB): A Dividend Powerhouse in Rising Rates

As the Federal Reserve continues its gradual rate hikes, the financial sector emerges as a strategic focal point for income-seeking investors. Among the ETFs capturing this momentum, the BMO Equal Weight Banks Index ETF (ZEB) stands out with its 0.145 CAD monthly dividend, positioning it as a compelling income generator in a market primed for sector rotation. Let’s dissect why ZEB is a tactical must-own for investors prioritizing yield and exposure to a strengthening financial landscape.

Why Banks Thrive in Rising Rates

The banking sector is inherently leveraged to rising interest rates. As central banks normalize rates, net interest margins—the difference between what banks earn on loans and pay on deposits—expand, directly boosting profitability. This dynamic has already fueled earnings growth for Canadian banks, which are among the world’s strongest. In this environment, ETFs like ZEB offer a streamlined way to capitalize on this trend while diversifying risk across the sector.

The ZEB Edge: Equal Weight vs. Market-Cap Peers

Most Canadian bank ETFs, such as the iShares Canadian Banks Index ETF (XBB), are market-cap weighted. This means they overweight the “Big Five” banks (Royal Bank, TD, etc.), which, while stable, often have lower dividend growth potential due to their size and regulatory constraints. In contrast, ZEB’s equal-weight strategy allocates the same percentage to all constituents, including mid-sized banks like Laurentian Bank and ATB Financial. This approach amplifies exposure to smaller institutions that typically offer higher dividend yields and faster earnings growth.

For instance, ZEB’s May 2025 dividend of $0.145 CAD per unit—payable on June 3—translates to an annualized yield of ~5.8% (assuming a May 2025 NAV of ~$30). Compare this to market-cap peers like XBB, which currently yield around 4.5%, according to recent estimates. The gap widens when considering ZEB’s monthly distributions, offering steady income flow versus quarterly payouts of traditional ETFs.

Sector Rotation: Banks as the Next Rotation Play

The S&P/TSX Composite has seen a recent rotation into value sectors like energy and materials. Yet, banks remain undervalued relative to their growth trajectory. With Canada’s economy showing resilience and loan demand strong, banks are well-positioned to outperform. ZEB’s equal-weight structure ensures investors don’t miss out on smaller banks’ upside while maintaining diversification.

Risks and the Case for Immediate Action

No investment is without risk. Banks face macroeconomic headwinds, including potential loan defaults and regulatory scrutiny. However, ZEB’s equal-weight model mitigates concentration risk, as mid-sized banks often serve niche markets less affected by broad economic downturns.

With ZEB trading near its 52-week lows and its dividend intact, now is a critical entry point. Investors can pair the ETF with covered-call strategies (e.g., Hamilton HMAX ETF) for further income enhancement, though ZEB’s pure exposure to bank fundamentals offers cleaner upside potential.

Final Analysis: ZEB as a Core Income Holding

The BMO Equal Weight Banks Index ETF (ZEB) combines high yield, sector diversification, and exposure to rising rate beneficiaries into a single package. Its May 2025 dividend of $0.145 CAD/month underscores its income appeal, while its equal-weight structure ensures smaller banks’ growth isn’t overlooked.

For investors seeking to capitalize on sector rotation and secure steady dividends, ZEB is a no-brainer. Act now before this under-the-radar ETF catches the attention of broader retail investors—and its price rises accordingly.

Disclaimer: Past performance does not guarantee future results. Investors should conduct their own due diligence.