3 Reasons to Bet on Bank ETFs Now

Bank ETFs rebounded lately after a prolonged period of volatility. A flattening yield curve was a major concern in mid-2019. However, the latest improvement in the space lifted bank ETFs like Nasdaq Bank ETF FT (FTXO - Free Report) , US Regional Banks iShares ETF (IAT - Free Report) , S&P Bank ETF SPDR (KBE - Free Report) and KBW Bank Invesco ETF (KBWB - Free Report) to a 52-week high on Nov 5 (see all financial ETFs here).

Let’s find out what’s working in favor of bank ETFs now.

Gradually Steepening Yield Curve

Since banks borrow money at short-term rates and lend capital at long-term rates, steepening of the yield curve is always a plus for bank ETFs. On Nov 5, the spread between the 10-year and two-year treasury yield stood at 23 percentage points versus 16 percentage points recorded at the start of the year, benefitting bank stocks and ETFs.

Actually, the movement of short-term bonds is more dependent on Fed behavior than long-term bonds. The Fed has enacted three rate cuts this year since July owing to rising global economic slowdown fears.

Meanwhile, reports of a phase-one trade deal between the United States and China in October boosted risk-on sentiments, which in turn provided a boost to the broader market. Meanwhile, Wall Street is hovering around a record high. These favorable developments contributed to the rise in long-term bond yields in recent weeks (read: S&P 500 at Record High: 6 ETF Winners of Last Week).

Favorable Earnings Picture

Per the Earnings Trends issued on Oct 31, 2019, about 89.7% of the S&P 500 financial companies reported earnings results, recording 1.3% earnings growth on 12.1% higher revenues. About 72.4% of the companies beat on the bottom line while 70.1% surpassed the top-line estimate. Overall, banks came out of third-quarter “earnings season with less bad earnings revisions,” per Bernstein’s Inigo Fraser-Jenkins, as quoted on barrons.com (read: Financial ETFs Gain Despite Mixed Earnings).

Focus on Value

Financial stocks are undervalued at the current level. The financial sector currently has a P/E of 12.48x versus 18.92x boasted by the S&P 500 ETF iShares Core S&P 500 ETF (IVV - Free Report) . Beta of the sector is 0.71x versus 1.05x beta of IVV. Price-to-Book ratio is 1.24x versus 5.00x of IVV. The sector also has less debt burden with a Debt-to-Equity ratio of 0.43x. This is down from the 0.72x debt-to-equity ratio boasted by the S&P 500.

Equity Performance

The financial sector (up 17.2%) has lagged the broader market this year (up 24.6%). However, the sector added 5.4% in the past month (as of Nov 5, 2019) versus 4.4% gains seen in IVV. This shows that the sector has picked up momentum and should stay strong in the near term.

Against this backdrop, we highlight a few bank ETFs that have a Zacks Rank #2 (Buy).

Financial Select Sector SPDR Fund (XLF - Free Report)

Vanguard Financials Index Fund ETF Shares (VFH - Free Report)

First Trust Financials AlphaDEX Fund (FXO - Free Report)

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>

Zacks Names "Single Best Pick to Double"

From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all.

It’s a little-known chemical company that’s up 65% over last year, yet still dirt cheap. With unrelenting demand, soaring 2022 earnings estimates, and $1.5 billion for repurchasing shares, retail investors could jump in at any time.

This company could rival or surpass other recent Zacks’ Stocks Set to Double like Boston Beer Company which shot up +143.0% in little more than 9 months and NVIDIA which boomed +175.9% in one year.

Free: See Our Top Stock and 4 Runners Up >>