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The journey this year for bank ETFs has been anything but smooth. The largest bank ETF, Invesco KBW Bank ETF (KBWB - Free Report) , is off 21% so far this year. First, a regional banking crisis caused by the failure of three U.S. banks in the early part of the year and then a flattening yield curve weighed on the bank ETFs. However, the tables are probably turning for the segment as the rates are peaking and the yield curve is steepening.
Inside the Steepening Yield Curve
As of Sep 26, 2023, the 10-year U.S. treasury yield was 4.56% and the two-year U.S. treasury bond yields were 5.04%. On the other hand, at the start of the month, the 10-year U.S. treasury yield was 4.18% and the two-year U.S. treasury bond yields were 4.87%. This indicates that the spread between two yields has been increasing, resulting in a steepening of the yield curve, which is great for banking stocks’ operation as it boosts net interest margin.
Cheaper Valuation of Bank ETFs
Most bank ETFs have a cheaper valuation than the S&P 500. Invesco KBW Bank ETF (KBWB - Free Report) , SPDR S&P Bank ETF (KBE - Free Report) and First Trust Nasdaq Bank ETF (FTXO - Free Report) have a P/E of 9.38X, 6.85X and 9.49X versus SPDR S&P 500 ETF Trust’s (SPY - Free Report) P/E of 17.86X. This indicates that the bank ETFs are undervalued with better growth prospects.
Banking Indicators Point to a Positive Recovery
Regional deposits and loans also rose in the middle of the year. The surge in sentiment can be seen in the future as well, as the Fed has given indication that rates have been peaking. Investors are speculating that the Fed will halt rate increases next year.
The Fed's dot plot projections unveiled the likelihood of one more rate hike in 2023, followed by two rate cuts in 2024, which are two less cuts than previously indicated in June. This would place the funds rate at around 5.1%. The projection for the fed funds rate in 2025, however, rose, with the median outlook at 3.9%, up from the 3.4% expected previously.
This predicted policy change could stimulate stock growth, especially in regional bank stocks, since experts believe the banking crisis was triggered by a sharp increase in interest rates over the past year (read: High-Dividend ETFs: Winners Amid Fed's Higher-For-Longer Rate Cues).
Bottom Line
Having said all, we would like to note that pure-play regional banking ETFs should be avoided as the operating backdrop is still edgy for the segment. These include iShares U.S. Regional Banks ETF (IAT - Free Report) , SPDR S&P Regional Banking ETF (KRE - Free Report) and First Trust NASDAQ ABA Community Bank ETF (QABA - Free Report) .
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3 Factors to Bet on Bank ETFs Now
The journey this year for bank ETFs has been anything but smooth. The largest bank ETF, Invesco KBW Bank ETF (KBWB - Free Report) , is off 21% so far this year. First, a regional banking crisis caused by the failure of three U.S. banks in the early part of the year and then a flattening yield curve weighed on the bank ETFs. However, the tables are probably turning for the segment as the rates are peaking and the yield curve is steepening.
Inside the Steepening Yield Curve
As of Sep 26, 2023, the 10-year U.S. treasury yield was 4.56% and the two-year U.S. treasury bond yields were 5.04%. On the other hand, at the start of the month, the 10-year U.S. treasury yield was 4.18% and the two-year U.S. treasury bond yields were 4.87%. This indicates that the spread between two yields has been increasing, resulting in a steepening of the yield curve, which is great for banking stocks’ operation as it boosts net interest margin.
Cheaper Valuation of Bank ETFs
Most bank ETFs have a cheaper valuation than the S&P 500. Invesco KBW Bank ETF (KBWB - Free Report) , SPDR S&P Bank ETF (KBE - Free Report) and First Trust Nasdaq Bank ETF (FTXO - Free Report) have a P/E of 9.38X, 6.85X and 9.49X versus SPDR S&P 500 ETF Trust’s (SPY - Free Report) P/E of 17.86X. This indicates that the bank ETFs are undervalued with better growth prospects.
Banking Indicators Point to a Positive Recovery
Regional deposits and loans also rose in the middle of the year. The surge in sentiment can be seen in the future as well, as the Fed has given indication that rates have been peaking. Investors are speculating that the Fed will halt rate increases next year.
The Fed's dot plot projections unveiled the likelihood of one more rate hike in 2023, followed by two rate cuts in 2024, which are two less cuts than previously indicated in June. This would place the funds rate at around 5.1%. The projection for the fed funds rate in 2025, however, rose, with the median outlook at 3.9%, up from the 3.4% expected previously.
This predicted policy change could stimulate stock growth, especially in regional bank stocks, since experts believe the banking crisis was triggered by a sharp increase in interest rates over the past year (read: High-Dividend ETFs: Winners Amid Fed's Higher-For-Longer Rate Cues).
Bottom Line
Having said all, we would like to note that pure-play regional banking ETFs should be avoided as the operating backdrop is still edgy for the segment. These include iShares U.S. Regional Banks ETF (IAT - Free Report) , SPDR S&P Regional Banking ETF (KRE - Free Report) and First Trust NASDAQ ABA Community Bank ETF (QABA - Free Report) .