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Bank of America Corp (NYSE: BAC ) delivered a 2016 total return of 33%. Year-to-date through Nov. 8, the BAC stock price is up another 22% leading some to question investing in BAC stock at these prices.
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Are they right? InvestorPlace's Ian Bezek thinks so.
"Of its immediate peer group, BofA (15.8x) actually has the highest PE ratio at the moment. Goldman Sachs Group Inc (NYSE: GS ), a clearly superior bank, is at just 12x earnings, and well-managed JPMorgan Chase & Co. (NYSE: JPM ) is at 14x," wrote Bezek on Nov. 9. "On key metrics such as Return on Equity 'ROE' and profit margin, BAC tends to rank in the middle of the pack or lower."
The banks have had a good run, but after two years of strong appreciation, it might be time to take some profits and look elsewhere in 2018. Now, I'm not suggesting you give up on BAC stock entirely, just that you reduce its weighting in your portfolio.
Heading into 2018, here are two ways you can have your cake and eat it too.
Equal Weight Makes Sense
I'm a big believer in equal-weight ETFs because they tend to capture the best-performing stocks in any given quarter and not just the biggest market caps.
"Equal weight offers an effective way to diversify risk associated with any one company, so for investors looking for sector or industry exposure, equal-weight indexing makes good sense," said Mark Yamada, president of PUR Investing Inc., a Toronto-based company specializing in the construction of ETF portfolios for advisors and institutional investors.
So, the question is should you go after BAC stock exposure through a bank- or financial services-related ETF? Or do you spread the net a little wider?
Either way, you're not going to get the same BAC stock weighting as you would owning Bank of America directly, but you won't get the downside risk of it reverting to the mean, either.
It's a tradeoff I'd be willing to make at this point in the bank's cycle.
The Financials Option
Guggenheim specializes in equal weight ETFs.
One of its funds is the Guggenheim S&P 500 Equal Weight Financials ETF (NYSEARCA: RYF ), which includes 67 stocks, all of them financial stocks and part of the broader S&P 500. Rebalanced quarterly to a weighting of approximately 1.49%, BAC is one of those 67 stocks.
Bank of America's current weighting among the $351.3 million in total assets is 1.61% which means it's appreciated since the last rebalancing at the end of September.
Bank stocks account for 26% of the portfolio, and insurance stocks have the biggest allocation at 34%. Capital markets account for another 30%, with consumer finance and diversified stocks the remainder.
Charging just 0.20% annually, RYF hasn't kept pace with BAC stock, but that could be about to change.
The Broader Option
Here, the Guggenheim S&P 100 Equal Weight ETF (NYSEARCA: OEW ) is the way to go. It's an equal-weighted option of the market-cap-weighted S&P 100 Index, 100 of America's blue-chip companies.
Although OEW charges double the annual fee of RYF, it provides much broader diversification - financials account for 16% of OEW's holdings with five other sectors in double digits - while still providing a BAC stock weighting of at least 1%.
Either ETF will get the job done, although I'd probably go with RYF simply because of the lower fee.
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