The financial sector of the U.S economy has been one of the best
performing sectors this year, both in terms of stock market
performance as well as quarterly growth in earnings. A comparative
analysis of State Street's Global Advisor's, Select Sector SPDRs
(sector based ETFs) reveals that the
Financial Select Sector SPDR (
- an ETF which tracks the performance of financial stocks listed in
the S&P 500, is up by 21.50% on a year-to-date basis as of
, 2012, behind only
Technology Select Sector SPDR (
which has returned 22.65% for the same time period.
The performance of XLF gives a fair indication of the
performance of the broader financial sector, as the ETF is
considered to be a mirror image of the performance of the financial
sector as a whole. However, all has not been smooth sailing for the
sector, especially the banking industry (read
Five Best Performing ETFs (So Far) in 2012
A series of banking scandals and hedging losses and worries over
the euro zone debt crisis continue to affect the investors'
sentiment towards the banking industry. Also, the diminishing
growth rate of the U.S GDP (1.5% for 2Q12 down 0.5% form 1Q12
growth rate of 2%) is a clear indication of the slowdown in the
economy caused primarily by demand driven factors.
Clearly, the marked slowdown in the economic growth coupled with
high unemployment levels have resulted in a deceleration in credit
growth in the economy. As a result, it has marred revenue growth
for the banks.
Also, while the ultra low rate policy of the Federal Reserve and
the third round of quantitative easing will surely give a boost to
the economy, it will also cause profit margins of banks to decline,
especially for bigger, asset-sensitive banks (read
Long Term Treasury ETFs: Ultimate QE3 Play?
Banks are now faced with a challenge of taking on additional
risks on the lending front in order to increase their net-interest
margins. However it would be at the expense of having to compromise
on their asset quality, a tradeoff which not all banks can afford.
Also, the recent monetary policies clearly suggest that the
interest rates are bound to remain low for quite some time,
therefore the net interest margins could remain under pressure.
Nevertheless, the U.S Banks are well positioned to respond to
regulators' shifts. Higher capital provisioning (with the
implementation of Basel 3) will no doubt result in lower Return on
Equity (ROE) for most banks, but will also strengthen the cushion
to absorb losses thereby preventing bank failures of any kind.
Also, the de-leveraging undertaken by banks will surely enhance
strength of the balance sheets; however this is bound to happen at
the expense of their near term profitability.
However, with the unexpected implementation of QE3, consumption
demand is likely to be restored in the economy. This will provide
an opportunity for banks to strengthen their top- line revenues in
the form of loan growth. Nevertheless, despite all the negativity,
the banking industry has shown great resilience, and for investors
looking for a basket approach in the industry, we have highlighted
a few ETFs that could be attractive investment opportunities.
SPDR S&P Bank ETF (
It is a product by State Street which tracks the performance of
the banking industry. Its portfolio is composed of the all the
banking stocks listed in the U.S stock exchanges as represented by
the S&P Banks Select Industry Index.
After losing more than 22% in 2011, it has come back strongly in
fiscal 2012 returning 20.6% in the first quarter (ending March
2012) itself. The ETF is up by almost 20% this year as on 26
September 2012. However, global economic pessimism and a series of
banking sector hedging losses and scandals had caused the ETF to
slump by 8% in the second quarter of fiscal 2012 (see
Two ETFs that Have Surged from Their Lows
).Since its inception in November of 2005, the ETF has been able to
amass $1.68 billion in its asset base. It charges investors a fee
of 0.35% annually and pays out 1.87% as yield. Also, the ETF boasts
of an average daily volume of more than 2.3 million shares. The ETF
holds 40 stocks with 27% allocation in the top 10 holdings.
KBE currently has a Zacks Rank of
3 or 'Hold'
PowerShares Dynamic Banking ETF (
Has a portfolio of 30 stocks that are engaged in deposit and
lending activities including banks, money centers as well as
regional banks. The stocks are selected based on various
fundamental factors which discount their share price performance,
management quality, acceleration in earnings as well as near term
market sentiments measured as market momentum.
PJB allocates 46% of its total assets in the top 10 holdings
which include names like J.P. Morgan Chase, U.S. Bancorp, Wells
Fargo & Co and BB&T Corporation. The ETF was launched in
October of 2006, however it has not been able to capture interest
of the investors as indicated by an asset base of just $12.60
Also, it charges a hefty expense ratio of 0.65% and pays out
1.35% as yield. On an average around 2,700 shares of PJB are traded
each day. This coupled with a below par asset base has resulted in
a high bid-ask spread ratio which would hurt investors by
increasing total cost of their investment in PJB (see more in the
From a performance perspective, PJB has returned around 20% so
far this year as on 26
September 2012. However, like most of the financial sector ETFs,
PJB was in turmoil last fiscal where it slumped almost 10% in 2011.
PJB currently has a Zacks Rank of
4 or 'Sell'
PowerShares KBW Bank ETF (
Launched in November of 2011, PowerShares KBW Bank ETF (KBWB)
seeks to track the pre expense price and yield performance of the
KBW Bank Index. The index is maintained and weighted by Keefe,
Bruyette & Woods, Inc.
The benchmark is modified capitalization weighted adjusted for
free float and measures the performance of U.S. listed banks and
Since its inception, the ETF has amassed $211.39 million in
assets, making it a reasonably popular choice for investors (read
Are Foreign Financial ETFs Back on Track?
). KBWB is a cost-effective choice for investors as it only charges
35 basis points per annum in fees and expenses compared to a
category average of 0.58%.
The ETF focuses on large cap mainstream banks as well as
regional banks and money centers. The fund currently holds a fairly
small portfolio of 24 securities in all and allocates 60.71% of the
total assets in its top 10 holdings.
After a brief correction in its prices in the month of June
2012, KBWB is trading at attractive valuations with a PE below 12
and price/book below 0.9. KBWB has posted impressive returns of
22.33% since its inception as of 31st August 2012 (see
For Financials, Look to These Top Zacks Ranked
KBWB currently has a Zacks Rank of
2 or 'Buy'
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SPDR-KBW BANK (KBE): ETF Research Reports
PWRSH-KBW BP (KBWB): ETF Research Reports
PWRSH-DYN BKG (PJB): ETF Research Reports
SPDR-FINL SELS (XLF): ETF Research Reports
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