With results from another batch of Federal Reserve stress
tests on U.S. banks expected to start trickling in later today,
the sector is showing signs of life, but investors need to
remember something. These are not the Comprehensive Capital
Analysis and Review, or the stress tests that really have the
potential to move banking shares.
The primary difference between the Dodd-Frank stress tests,
the results of which are coming out today, and the Comprehensive
Capital Analysis and Review is that the latter is what the Fed
uses to approve or disapprove a bank's capital plans. Said
another way, the Comprehensive Capital Analysis and Review is
what the Fed uses to sign off on or reject a bank's dividend
and/or share repurchase plans.
However, waiting another week for the results of the
Comprehensive Capital Analysis and Review does not diminish the
importance of the headlines banks will generate over the next 24
hours. With a plethora of
devoted to the financial services sector, nimble traders will
want to consider some of the following funds.
Financial Select Sector SPDR (NYSE:
) As the largest financial services ETF (over $10.8 billion in
assets under management) and most heavily traded (average daily
volume of almost 49 million shares), XLF makes for a predictable
member of this list. Predictable or not, XLF is where traders
have been heading to make stress test-related bets. Through
midday Thursday, over 230,000 options contracts changed hands on
XLF with 217,000 of those contracts being calls,
according to Options Monster
J.P. Morgan Chase (NYSE:
) and Wells Fargo (NYSE:
) are XLF's largest and third-largest holdings, respectively,
combing for almost 17 percent of the ETF's weight. Throw in an
almost three percent allocation to US Bancorp (NYSE:
), and XLF is heavily weighted to some of the most financially
sound banking names.
No one can make any guarantees regarding whether or not those
three banks will raise their dividends in the next week, but two
things are clear. First, as the case with so many big banks, J.P.
Morgan, US Bancorp and Wells Fargo are paying dividends that are
nowhere close to pre-financial crisis levels. Second, all three
have been trying to do something about, boosting their payouts
over the past two years. Bottom line: XLF does offer compelling
intimacy to dividend ebullience for the big banks.
Market Vectors Bank and Brokerage ETF (NYSE:
) One thing that investors should note about RKH is that the ETF
is not a pure play on U.S. banks. In fact, the U.S. accounts for
less than 40 percent of RKH's weight. However, the ETF does offer
plenty of utility as a stress test play over the next week and
that utility comes by virtue of a trait that often unappealing in
What that means is RKH
is highly concentrated among a few names
. The top-10 holdings represent almost 59.4 percent of the ETF's
weight, but more importantly, J.P. Morgan, Wells Fargo, Bank of
) and Citigroup (NYSE:
) combine for nearly 28 percent.
With investors eager to see if the Fed will approve share
repurchases and dividends by Bank of America and Citigroup, RKH
should be in play over the next week.
PowerShares KBW Bank Portfolio (NYSE:
) The PowerShares KBW Bank Portfolio does not garner the
attention that XLF or some of the other big bank ETFs do, but
KBWB does have over $100 million in assets and volume is strong
at over 671,000 shares.
More important than those superficial statistics is how KBWB
is a useful stress test play. Simply put, investors looking to
profit from potentially good news out of BofA or Citi without
wanting to make a stock-specific bet need to consider KBWB. Those
names combine for
over 19 percent of KBWB's weight
Additionally, KBWB features ample exposure to some of the more
controversial regional names, such as SunTrust (NYSE:
) and Regions (NYSE:
), that could (emphasis on "could") benefit from stress test news
KBWB is not bereft of high quality names, though. J.P. Morgan,
Wells Fargo, U.S. Bancorp and BB&T (NYSE:
) combine for nearly 24 percent of the fund's weight.
For more on ETFs, click
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