Bank ETFs Hitting Multi-Year Highs As Rates Hike Nears
The financial sector has clearly emerged out of the worst recession seen in 2008 and is showing strong momentum over the past one year, thanks to improving fundamentals and positive sentiment across banks. A healthy job market, growing manufacturing and service sectors, renewed housing recovery, and rising consumer confidence are leading to higher demand for all types of financial services, spreading optimism into the whole sector. In particular, banking corner of the space has been leading the way in recent sessions with most of the stocks and ETFs logging impressive gains. The robust performance came from speculations of interest rates hike in the U.S. that now looks much closer (as early as September), given robust job numbers and modest inflation. A rising interest rate scenario would be highly profitable for the banks, whose profits have been crimped by a shrinking interest rate spread following nearly six years of ultra-low rates. This is because banks seek to borrow money at short-term rates and lend at long-term rates. Now, with the rise in interest rates, banks would be able to earn more on lending and pay less on deposits. This would expand net margins and bolster banks’ profits. Further, U.S. banks now have much stronger balance sheets, and their quality of earnings is improving on a step-up in the economy. Added to the strength is solid loan growth, higher trading income, rising credit quality and litigation settlements. As the banks’ loan portfolio gains health, they will need less loan loss reserves in the future pointing to gainful trading for banking stocks and ETFs ahead. Moreover, the upside in this corner of the space could be confirmed by the Zacks Industry Rank, as five out of six banking industries actually have a solid Rank in the top 44% at the time of writing. Given this, bank ETFs have been grabbing investors’ interest lately and are hitting new multi-year highs in recent trading sessions. Any of the following funds could be solid picks for investors to ride out the surge resulting from higher rates: SPDR S&P Bank ETF (NYSEARCA: KBE ) This fund tracks the S&P Banks Select Industry Index and has an AUM of $2.8 billion. Volume is good as it exchanges more than 1.4 million shares a day while the expense ratio is at 0.35%. The product holds a diversified basket of 65 stocks with none holding more than 1.84% of total assets. It is slightly tilted toward small caps with more than half of the portfolio while the rest is split between the other two cap levels. From a sector look, more than three-fourths of the portfolio is allotted to regional banks while diversified banks, thrifts & mortgage finance, asset management & custody banks and other diversified financial services take the remainder. KBE hit a new high of $36.47 per share in nearly six years, representing a gain of about 10.3% in the past one-year timeframe. PowerShares KBW Bank Portfolio (NYSEARCA: KBWB ) This fund provides exposure to 24 stocks by tracking the KBW Bank Index. It is concentrated on the top four firms that make up for at least 8% share each. Though banks account for 88% share, consumer finance and investment companies also take minor allocations in the basket. Here, the fund focuses on large caps at 69% followed by mid-caps. The fund has amassed $351.9 million and trades in good volume of 126,000 shares per day on average. Expense ratio came in at 0.35%. The ETF hit a multi-year high of $40.34 per share, and has moved higher by about 11% in the past one year. SPDR S&P Regional Banking ETF (NYSEARCA: KRE ) This is one of the largest and the most popular ETFs in the banking space with AUM of nearly $2.2 billion and average daily volume of around 4 million shares. The product follows the S&P Regional Banks Select Industry Index, charging investors 35 basis points a year in fees. Holding 91 securities in its basket, the fund is widely spread out across each security with an equal-weighted approach. Small caps dominate the fund’s return at 76%, followed by mid caps (16%) and large caps (7%). The fund hit a new high of $44.30 since September 2008 and is up about 11% over the trailing one-year period. PowerShares KBW Regional Banking Portfolio (NYSEARCA: KBWR ) This fund follows the KBW Regional Banking Index, holding 50 stocks in its basket with none holding more than 4.06% share. It is a small cap centric fund as these account for 85% of the portfolio, while the rest goes to mid caps. The ETF is often overlooked by investors as depicted by its AUM of $34.3 million and average daily volume of under 4,000 shares. It charges 35 bps in fees per year from investors and hit a multi-year high of $43.71 per share, representing a gain of about 14% in the same period. iShares U.S. Regional Banks ETF (NYSEARCA: IAT ) This ETF offers exposure to 53 regional bank stocks by tracking the Dow Jones U.S. Select Regional Banks Index. Large caps dominate more than half of the portfolio with U.S. Bancorp (NYSE: USB ) and PNC Financial Services (NYSE: PNC ) taking the largest share with a combined 31% of assets. Other firms hold no more than 7.05% share. The fund has amassed $590.1 million in its asset base while sees good volume of 162,000 shares a day. It charges 43 bps in annual fees and surged 8.5% over the past one year to touch a multi-year high of $37.14 per share. Original Post
