It made me wonder. In 2011, small banks far outperformed larger
But could the shuttering of First State Bank in Stockbridge,
Ga., the Central Florida State Bank and American Eagle Savings Bank
mean the outperformance of smaller banks has run its course?
The chart below shows the indexes tracked by three major U.S.
Banks ETFS:the PowerShares KBW Bank Portfolio (NYSEArca:KBWB), the
iShares Dow Jones U.S. Regional Banks ETF (NYSEArca:IAT) and the
SPDR S'P Bank ETF (NYSEArca:KBE).
I used index, rather than ETF, data because KBWB launched in
November 2011. Thatâs just too recent for credible analysis, plus
KBE switched its underlying index in October 2011.
The ETF KBWB tracks the KBW Bank Index, while iSharesâ IAT
tracks the Dow Jones U.S. Regional Bank Index. Also, SSgAâs KBE
now tracks the S'P Banks Select Industry Index (SPSIBK).
KBE includes the 24-largest banks in the United States, weighted
in a modified-market cap scheme. I wrote about the weighting scheme
in an earlier blog, The KBW Index Shuffle.
KBE equally weights all Nasdaq- and NYSE-listed U.S. banking
stocksâthus, it underweights the big banks and tilts to the
smaller ones. Finally, IAT, the iShares fund, only includes small
banks, weighted by their market capitalizations.
As the big banks got hammered by their exposure to European
debt, smaller banks suffered a little bit, but ultimately recovered
by the end of the year.
Adding some of the big banks into the graph adds a little color
to the picture:
The banks all tend to move in the same direction as each other,
but Citigroupâs plummeting stock didnât pull IATâs index down
nearly as much as KBWBâs.
Since the beginning of 2012, the banks, as well as indexes that
hold them, have started to recoverâagain driven by their big
holdings. As Wells Fargo and JPMorgan recover, KBWB has been
outperforming the smaller IAT.
Still, as you can see from the graph above, returns are far from
steady. According to Yahoo Finance, Wells Fargo currently has a
beta of 2, and JPMorgan isnât far behind, with a beta of 1.58.
Citigroup is the most volatile of the group, with a beta of 3.
In contrast, KRXâs largest holdingâU.S. Bancorpâhas a beta
of only 1.23.
It appears that, contrary to the general state of affairs, the
high-beta play in banks is now the large-caps, while the
comparatively low-beta play is small-cap banks.
The moral of the story is to still be very careful about
investing in the banks. Paul Baiocchi made a similar point a month
ago about avoiding Bank of America.
If youâre sure about getting back into the banks, be certain
you understand exactly what youâre getting into. If the economy
continues to recover, these banks may return impressive figures.
If, however, debt concerns resurface or the economy enters another
free fall, they can also be very dangerous.
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