The financial sector which is said to be the leading indicator
of the overall market trend has been lately exhibiting a bullish
sentiment. In fact the recent rally in the equity market is
mostly attributable to the performance of banking stocks. The
possible driver of the strong performance of the sector could be
strength in earnings of the majority of banking stocks.
After posting poor results in the second quarter last year,
bank stocks tapped the growth momentum in the third quarter. In
the third quarter, banks reported solid growth in profits not
seen in the last six years. Profits surged nearly 7% in the
said quarter (
Does Your Portfolio Need a Financial ETF?
Investors should note that the banking sector has proven to be
a good investment opportunity this earnings season as well. The
sector could maintain its relative strength attributable to
strong banking numbers from most of the banking stocks.
Big names like Goldman and JP Morgan Chase reported strong
fourth quarter earnings while Bank of America and Citigroup were
found to be weighed down by settlements and steep legal expenses.
Investors should further note that after three years the rise in
profits is principally from traditional sources of revenue rather
than from release of funds reserved for bad loans.
The last few sessions actually saw the banking sector
on the verge of a breakout. If the numbers from the banks
continue to be strong these ETFs may breakout yet again forming
new highs. This can only bode well for the market overall (
Three Financial ETFs Outperforming XLF
A Glimpse of the Banking Sector in 2013
Progress seen in the past one year gives a clear growth
indication for the U.S. banking sector. Besides contraction in
provisions for credit losses and cost containment, a marked
recovery in the equity markets and consequent revenue growth led
most of the banks to report higher-than-expected earnings.
Expanding consumer credit and overall improvement in lending
activity made it easy for the banks to sustain the
In fact U.S. banks lare poised for further growth in 2013 with
uninterrupted expense control, sound balance sheets, an uptick in
mortgage activity and lesser credit loss provisions (
Banking ETFs 101
Moreover, a favorable equity and asset market backdrop,
progressive housing sector and an accommodative monetary policy
are expected to make the road to growth smoother.
However, it should also be noted that though improved economic
data such as higher consumer spending and gross domestic product
(GDP), improving housing market and declining unemployment rate
point towards optimism, a paltry interest-rate environment is
disturbing for the sector.
Given the strong earnings performance in the last reported
quarter and the upswing in the market in 2013, investors may well
want to capitalize on the positive sentiment driving
In order to play this segment of the market, we have briefly
highlighted a few ETFs that give exposure to banking stocks.
SPDR S&P Bank ETF (KBE)
KBE is an SPDR ETF offering a narrow exposure to 42 banking
stocks. The fund manages and asset base of $1.9 billion and
provides liquidity to investors as indicated by its trading
volume of more than 1 million shares a day. It charges a fee of
35 basis points on an annual basis.
Among individual holdings, Popular Inc, Svb Finl Group and
Comerica Inc occupy the top three positions in the fund, while
the top ten holdings together get a share of 27.1%
The fund has been a good performer in 2012 returning 22.7% to
investors while strong fourth quarter earnings provided a nice
boost to the ETF as indicated by the year-to-date gains of 9.5% (
Financial ETFs Set to Rally in Earnings
PowerShares Dynamic Banking ETF (PJB)
PJB selects the stocks 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.
This results in a portfolio with asset under management of
$10.6 million and total holdings of 30 stocks.
PJB allocates 46.5% of its total assets in the top 10 holdings
which also include industry bellwethers like JP Morgan Chase,
U.S. Bancorp and Wells Fargo & Co. The top three positions go
to JP Morgan Chase, Huntington and Fifth Third Bancorp.
The fund appears to be a bit pricey when compared to others as
its charges a fee of 65 basis points annually. On an average
around 2,900 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 the total cost of
their investment in PJB.
PJB returned around 16.4% in 2012 and has gained 6.54% so far
PowerShares KBW Bank ETF (KBWB)
The fund manages an asset base of $96.1 million and is home to
a very small basket of 24 companies. KBWB charges a fee of 35
basis points annually (
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The top ten holdings play a very dominant role in the fund's
performance as nearly 60% of the asset base goes towards them.
Among individual holdings, industry mammoths like Bank of
America, Citigroup and JP Morgan Chase take up the top three
holdings in the fund while Wells Fargo occupies the fourth
KBWB has exhibited a very strong performance in 2012 as
indicated by its 2012 return of 32.42%. Also, the fund started
the year on a strong note as revealed by its year-to-date return
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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
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