Banking ETFs: Why This Time May Be Different

February 23, 2017

Why Diversified Banks Can Benefit

“Diversified banks can be big a beneficiary of the above developments and a strengthening economy,”

explained Nick Kalivas, senior equity product strategist at PowerShares. “Regional banks already had a strong run, and there is a perception diversified banks are being held back because of the regulatory challenges.”

In ranking approximately 960 equity ETFs, CFRA combines holdings-level analysis with ETF-level relative attributes. An ETF is reviewed based on the valuation and risk considerations of the holdings as well as its expense ratio and bid/ask spread.

The PowerShares KBW Bank Portfolio (KBWB), a financial ETF with $979 million in assets, pulled in $311 million in new money year-to-date through Feb. 17, according to data on At the end of January, assets were primarily split between diversified banks (42% of assets) and regional banks (41%), with smaller stakes in asset management and custody banks (11%), and consumer finance companies (4%). Bank of America, J.P. Morgan and SunTrust were among the fund’s top-10 holdings. KBWB has a 0.35% expense ratio.

Meanwhile, the Financial Select Sector SPDR (XLF), a $25 billion ETF, expanded its asset base by $1.5 billion year-to-date. While banks (45% of assets) was the largest industry, predominantly through large-cap diversified banks, the capital markets, diversified financial services and insurance industries each had double-digit percentages of assets. XLF has a 0.14% net expense ratio.

Regional Banks Favored In Multi-Cap Approach

A similar multi-industry offering, the Vanguard Financials Index Fund (VFH) pulled in $475 million in new money, expanding its assets to $5.6 billion. Here, too, bank exposure (46%) is larger than the other industries, though regional banks are more heavily weighted due to the multi-cap nature of the portfolio. For example, midcap Signature Bank is a VFH holding, but the bank is not inside XLF. Insurance and capital markets industries are each 10%-plus of the ETF’s assets. VFH has a 0.10% expense ratio.

In contrast, the asset base has shrunk in 2017 due to a fellow SSGA offering, the SPDR S&P Bank ETF (KBE). The $3.3 billion fund has had $67 million in assets in net outflows in 2017. Unlike KBWB, XLF or VFH, KBE is an equally weighted portfolio.

Yet similar to KBWB, KBE has a 0.35% expense ratio and has 80%-plus of its assets in banks. KBE has more than 70% in regional banks, and a much smaller stake in diversified banks, making it quite different than the PowerShares product. Not surprisingly to us, KBWB underperformed KBE in 2016, but has done better year-to-date through Feb. 17.

At the time of writing, neither the author nor his firm held any of the securities mentioned. Todd Rosenbluth is director of ETF and mutual fund research at CFRA, an independent research firm that acquired S&P Global Market Intelligence's equity and fund business in October 2016. He can be reached at [email protected]. Follow him at @ToddCFRA


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