Why the Hamilton Canadian Bank Equal-Weight Index ETF (HEB) Is a Strategic Play for Income-Oriented Investors in 2025

In 2025, the search for income-generating investments with resilience and cost efficiency has taken on renewed urgency. Amid a backdrop of global trade tensions, inflationary pressures, and shifting monetary policy, investors are seeking strategies that balance risk and reward. The Hamilton Canadian Bank Equal-Weight Index ETF (HEB) emerges as a compelling solution, offering a low-cost, diversified, and income-focused approach to one of Canada's most stable sectors. By leveraging equal-weight exposure to the country's six largest banks, HEB provides a unique combination of monthly dividends, structural advantages, and outperformance potential that aligns with the priorities of income-oriented investors.

The Case for Equal-Weighting in a Concentrated Sector

Canada's banking sector is dominated by six institutions—Royal Bank of Canada (RY), Toronto-Dominion Bank (TD), Bank of Montreal (BMO), Bank of Nova Scotia (BNS), Canadian Imperial Bank of Commerce (CIBC), and National Bank of Canada (NA). These banks collectively account for over 80% of the sector's market capitalization, making it inherently concentrated. Traditional market-cap-weighted ETFs inherently favor the largest players, such as RY and TD, which can skew returns and expose investors to underperforming smaller banks.

HEB's equal-weight strategy mitigates this risk by allocating approximately 16.67% to each of the six banks. This approach ensures no single institution disproportionately influences the portfolio. For example, as of June 30, 2025, the ETF held National Bank of Canada (17.5%), Canadian Imperial Bank of Commerce (17.3%), and Toronto-Dominion Bank (17.2%), reflecting a near-perfect balance. This structure promotes diversification and reduces the volatility associated with sector concentration.

Moreover, the equal-weight model incorporates a natural rebalancing mechanism. The Solactive Equal Weight Canada Banks Index, which HEB tracks, systematically trims exposure to outperforming banks and adds to underperforming ones during each rebalancing period. This creates a "buy-low-sell-high" effect, potentially enhancing long-term returns. For instance, if one bank's stock price surges due to short-term gains, the ETF reduces its weight to 16.67%, locking in profits and redirecting capital to lagging peers.

Cost Efficiency and Fee Rebates: A Tailwind for Returns

HEB's expense ratio of 0.25% is already competitive with broader market ETFs, but its cost structure is further optimized by a management fee rebate of 0.19%, reducing the effective management fee to 0.00% until January 31, 2026. This rebate is a rare advantage in the ETF landscape, directly boosting net returns for investors. For context, the average expense ratio for Canadian bank ETFs in 2025 is 0.35%–0.50%, making HEB a standout option for cost-conscious investors.

A 4.05% Dividend Yield with Tax Efficiency

HEB's dividend yield of 4.05% as of June 30, 2025, is among the highest in its category, driven by the consistent dividend policies of the underlying banks. The ETF distributes dividends monthly, a critical advantage for income-oriented investors who prefer regular cash flow over quarterly payouts. The most recent distribution of $0.072 per unit on July 8, 2025, underscores this reliability.

Crucially, the dividends are primarily classified as eligible Canadian dividends, which qualify for the Canadian dividend tax credit. This tax efficiency makes HEB particularly attractive in taxable accounts, where it outperforms ETFs with lower dividend yields or non-eligible income. For example, while the S&P/TSX Composite's dividend yield hovers around 3.2% in 2025, HEB's yield is 100 basis points higher, offering a clear edge for income seekers.

Resilience of the Underlying Banks: A Foundation for Stability

The structural strength of Canada's big six banks underpins HEB's appeal. These institutions have maintained robust balance sheets, with average common equity Tier 1 (CET1) ratios of 13.3% as of Q1 2025—well above regulatory minimums. Their liquidity coverage ratios (LCRs) also remain strong, averaging 133% for large banks and over 200% for medium-sized banks, ensuring they can withstand liquidity shocks.

Stress tests conducted by the Bank of Canada and the International Monetary Fund (IMF) in 2025 further validate their resilience. Even under a severe global economic shock scenario—5.1% GDP contraction, 9.2% unemployment peak, and significant equity and housing market corrections—these banks retained capital above regulatory thresholds. Their ability to absorb losses is bolstered by elevated provisions for credit losses, which increased by 8% year-over-year.

Performance and Outperformance Potential

HEB's performance in 2025 has been nothing short of impressive. As of July 24, 2025, the ETF has delivered a 37.19% total return since inception on April 3, 2023, with a 10.92% year-to-date return and a 15.35% 3-month return. These figures outpace broader market benchmarks, including the S&P/TSX Composite, which has returned 8.5% year-to-date. The equal-weight strategy's rebalancing mechanism and the banks' strong earnings growth (e.g., Bank of Montreal's 60% year-over-year profit increase) have driven this outperformance.

Strategic Rationale for Income-Oriented Investors

For investors prioritizing income and capital preservation, HEB offers a compelling value proposition. Its combination of low costs, monthly dividends, and exposure to resilient banks creates a "win-win" scenario: steady cash flow and the potential for capital appreciation. The equal-weight structure further enhances this by avoiding the pitfalls of overconcentration and leveraging the sector's structural advantages.

In a world of rising uncertainty, HEB's disciplined approach to risk and reward aligns with the principles of long-term, passive investing. By focusing on a sector with strong fundamentals and a history of outperforming during economic cycles, investors can position themselves to benefit from both income and growth.

Conclusion: A Strategic Allocation for 2025 and Beyond

The Hamilton Canadian Bank Equal-Weight Index ETF (HEB) is more than just an income vehicle—it is a strategic allocation for investors seeking to capitalize on the resilience and stability of Canada's banking sector. With its low-cost structure, monthly distributions, and equal-weight framework, HEB addresses key challenges faced by income-oriented investors, including volatility, tax inefficiency, and concentration risk.

As global markets navigate the complexities of 2025, HEB stands out as a vehicle that balances the need for income with the potential for outperformance. For those seeking a reliable, tax-efficient, and diversified source of monthly income, HEB deserves a prominent place in the portfolio.