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ETFs In the Line of Fire as Moody's Might Downgrade US Banks

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The coronavirus-led shutdowns have been escalating in the United States, as more than 6,500 people have tested positive and at least 110 have died. All 50 states in the United States and the District of Columbia have confirmed cases of coronavirus. Globally, the number of infected cases has risen to more than 200,000, with a death toll of around 8,000 (read: ETF Strategies to Follow Amid the Coronavirus Crisis).

The outbreak has disrupted global supply chains and economic activities. Moreover, analysts are increasingly speculating a global recession, given the rate at which the outbreak is spreading in Italy, France, Spain, Germany, the U.K. and the United States. The rapid spread of the virus is leading to sweeping travel bans and cancellation of large events, as well as shutting down of schools, colleges, universities, restaurants and bars, and shopping malls. In such a scenario, slowing global economic growth looks inevitable. In this regard, JPMorgan estimates that a recession will hit the U.S. and European economies by July. According to the financial services firm, the U.S. economy might contract 2% in the first quarter and 3% in the second. Meanwhile, it expects the eurozone economy to shrink 1.8% and 3.3% during the same periods.

Amid the coronavirus pandemic, the Fed Chair Jerome Powell once again surprised Wall Street by slashing interest rate to near zero, marking the lowest level since late 2015, and rolling out a quantitative easing program of at least $700 billion (read: Fed Cuts Rates to Near Zero: ETFs & Stocks to Explode Higher).

The U.S. banking sector was already having a difficult time this year. In this regard, the Dow Jones U.S. Banks Total Return Index has already plummeted 39.3% since the beginning of 2020 compared with the Dow Jones Industrial Average’s 25.6% decline. Amid the Federal Reserve’s rate cut and as the global coronavirus pandemic spirals out of control, it is being speculated that the Moody’s Investors Service might downgrade U.S. banks. Moody’s has noted, “the growing strain on banks’ operating environment and asset risk from the ongoing coronavirus disruption of economic and business activity.”

Moreover, it is a well-known fact that banks thrive in a rising rate environment. Hence, a rate cut is detrimental to these financial firms. As interest rates fall, banks will earn less on lending. This, in turn, strains net interest margins (read: Should You Buy Bank ETFs Now? Let's Find Out).

These factors do not paint a rosy picture for the banking sector. Let’s take a look at some bank ETFs for our investors:

SPDR S&P Regional Banking ETF (KRE - Free Report) — down 44.3% year to date

This fund has an AUM of $1.28 billion. It follows the S&P Regional Banks Select Industry Index, charging investors 35 basis points (bps) a year in fees. Holding a basket of 122 securities, the fund is widely spread out with each security holding less than 3.9% of the assets (read: What Coronavirus Induced 'Emergency' Rate Cut Means for Banks)

SPDR S&P Bank ETF (KBE - Free Report) – down 42.9%

This fund offers equal weight exposure to 90 banking stocks by tracking the S&P Banks Select Industry Index. Regional banks dominate the portfolio with 73.8% share, while thrifts & mortgage finance, diversified banks, other diversified financial services, and asset management & custody banks take the remainder. It has amassed $1.27 billion in its asset base. The product charges 35 bps in annual fees (read: Bank ETFs to Ride High on the Holiday Shopping Spree).

Invesco KBW Bank ETF (KBWB - Free Report) — down 32.4%

This fund provides exposure to 24 companies, primarily engaged in U.S. banking activities by tracking the KBW Nasdaq Bank Index. It is concentrated on the top five firms that make up for more than a 7.1% share each. The fund has managed $401 million in its asset base. The expense ratio comes in at 0.35% (read: Coronavirus Fuels Madness in These Sector ETFs & Stocks).

First Trust Nasdaq Bank ETF (FTXO - Free Report) — down 45.4%

This fund follows the Nasdaq US Smart Banks Index, measuring the performance of U.S. companies within the banking industry. It holds 31 securities in its basket with none representing more than an 8.56% share. The ETF has an AUM of $91.2 million. It charges 60 bps in annual fees.

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