The Editor-in-Chief of well-respected publisher ETF Stream, Tom Eckett, published a rare editorial Friday March 24 saying the big selloff in banks due to fear of contagion was close to over.\u00a0 He said at these levels, bank ETFs were at rarely seen low levels compared with earnings expectations and should not be thrown off too much by the so-called crisis caused by half a dozen bad actors. He especially prefers ETFs to bank stocks in this situation because there is safety in numbers.\u00a0 So even if one more bad actor is found, the ETF won\u2019t be hurt that much.<\/p>\n
This week\u2019s article consults the Value Engine\u2019s predictive model on Bank ETFs and their top holdings.\u00a0 For a change, I\u2019ll give the answer to the title question ahead of the analysis.\u00a0 The predictive and valuation models both agree with Tom.\u00a0 The momentum against banks is showing signs of settling and no longer resembling a falling knife.\u00a0 The stocks of strong banks with high earnings expectations are now selling at what our valuation model considers bargain prices.\u00a0 So yes, if you are an active or semi-active investor you may wish to consider bank ETFs and bank stocks now.<\/p>\n
The three ETFs used in this analysis are:<\/p>\n
XLF <\/b>\u2013 Financials Select Sector SPDR Fund.\u00a0 XLF<\/b> offers efficient exposure to the heavyweights in the US financials segment. It is a cap-weighted, S&P 500-only portfolio which means that it\u2019s concentrated in large banks and avoids small-caps.<\/p>\n
KRE<\/b>– SPDR S&P Regional Banking ETF. KRE <\/b>covers the regional banks segment of the S&P Total Market Index, an index that tracks the broad US equity market. Companies that meet certain market-cap and liquidity requirements will be included in the fund\u2019s final holdings. Selected securities are then equally-weighted, subject to liquidity constraints. Overall, KRE\u2019s equal-weighting scheme reduces single stock risk in the larger names and helps to draw further distinctions from peers with big positions in large-cap names.<\/p>\n
KBWR – <\/b>Invesco KBW Regional Banking ETF. KBWR<\/b> doesn’t attempt to provide broad exposure to the US banking segment. Instead, the fund employs an index committee selection process, along with modified market-cap weighting to construct a portfolio of regional banking and thrift firms. This process makes an already small-cap oriented portfolio tilt even smaller. In fact, KBWR<\/b>‘s portfolio has one of the smallest average market caps in the segment. The fund’s scope does not stray from its narrow mandate. It provides the exact exposure it promises, with no industry tilts.<\/p>\n
This trio provides very different choices for potential investors that look under their hoods.\u00a0 XLF <\/b>is simply a cap-weighted slice of banks, credit issuers, and insurance companies that are in the S&P 500 Index.\u00a0 It includes Berkshire Hathaway, JP Morgan Chase, Goldman Sachs, Mastercard Int\u2019l., Citi, etc.\u00a0 KRE <\/b>focuses on regional banks in an index that includes midcap and small cap stocks and is equally weighted.\u00a0 New York Community and Citizens are its largest holdings.\u00a0 KBWR <\/b>uses a committee to make active selection of stocks in its index and holds many small regional banks.\u00a0 Its average market cap tends to be lower than even that of KRE<\/b>.<\/p>\n
These three financial and Bank ETFs are compared with IVV<\/b>, iShares S&P 500 Index ETF, that serves as a proxy for the broad US stock market.\u00a0 All data as of March 26. 2023.<\/p>\nCurrent ValuEngine reports on these stocks or ETFS can be viewed<\/b> HERE<\/b><\/a><\/h5>\n