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Top Ranked Financial ETF in Focus: KBWB

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The financial sector, which has been a leader of the overall market, has been lately exhibiting a bullish sentiment. Financials posted a strong performance this year although much is still left to be achieved.

Investors should note that the banking sector has proven to be a good investment opportunity recently, thanks to solid earnings. The sector could maintain its relative strength attributable to strong banking numbers from most of the top stocks in the space (2 Sector ETFs Surging This Earnings Season).

Financial stocks tapped into the growth momentum in second quarter earnings. In the quarter, approximately 80% of companies posted better than expected results. However, financial sector stocks appear to be trading at a discount. It appears that financial stocks are benefiting from better credit conditions and improvement in gross loan growth.

Now that the interest rate environment is reversing and the Fed may announce that it is tapering its bond buying program, bank stocks will certainly benefit. With the increase in interest rates, banks are likely to profit and perform better because they can borrow at lower short term rates and lend at higher long term rates. Banks can thereby widen their spread, leading to higher profits (3 Banks ETFs Leading the Pack This Earnings Season).

Given this bullish trend, a look at some of the top ranked ETFs in the space could be a good way to target the best of the segment with lower levels of risk.

Investors looking to tap this segment in basket form can invest in PowerShares KBW Bank Portfolio (KBWB - Free Report) which is a #1 Zacks ETF Rank (Strong Buy) fund. We expect it to outperform its peers over the next year. Thanks to this, the product could be worth a closer look by investors seeking exposure to this corner of the economy.

About the Zacks ETF Rank

The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box or asset class (read: Zacks ETF Rank Guide). Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely Low, Medium or High.

The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of the five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk.

For investors seeking to apply this methodology to their portfolio in the Financial sector, we have taken a closer look at the top ranked KBWB. This ETF has a Zacks ETF Rank of 1 or ‘Strong Buy’ (see the full list of top ranked ETFs) and is detailed below.

PowerShares KBW Bank ETF (KBWB)

Launched in November of 2011, PowerShares KBW Bank ETF seeks to track the pre expense price and yield performance of the KBW Bank Index. The index is maintained and weighted by Keefe, Bruyette & Woods, Inc.

The benchmark is modified capitalization weighted adjusted for free float and measures the performance of U.S. listed banks and money centers.

It is a passively managed exchange traded fund (ETF) designed to deliver the return of the banking industry in the Financial Sector of the U.S equity markets. KBWB provides an aggressive exposure in the banking industry of the broader U.S. financial sector (3 Surging Financial ETFs Beating The Market).
Since its inception, the ETF has amassed $143.6 million in assets, making it a reasonably popular choice for investors.

This ETF is appropriate for investors looking for concentrated exposure in the U.S. financial sector. KBWB is a cost-effective choice for investors as it only charges 35 basis points per annum in fees and expenses compared to a category average of 0.58%.

The ETF focuses on large cap mainstream banks as well as regional banks and money centers. The fund currently holds a fairly small portfolio of 24 securities in all and allocates 59.32% of the total assets in its top 10 holdings (Time To Consider Pure Growth and Value ETFs).

Citigroup Inc (9.15%), Bank of America Corp (8.39%), J.P Morgan Chase & Co (8.26%) are the top three holdings.

KBWB has posted impressive gains in both the one year and year to date periods. The fund recorded a gain of 22% in the year-to date period while it has delivered a return of 26.9% over a period of one year.
We believe that this strong momentum can continue, and that KBWB can remain atop the pack in the financial ETF space.

The sector is poised to benefit from a tapering of bond purchases, and a more robust American economy will boost loan growth, suggesting that this top ranked ETF may still be a great play.

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