The broad U.S. benchmarks are now at all-time highs, buoyed by improving economic fundamentals and a loose monetary policy. As such, the SPDR S&P 500 ETF (SPY), tracking the broad S&P 500 index, is up 9.3% year-to-date.
In this solid macro backdrop, the financial sector ETF – Financial Select Sector SPDR (XLF) –has turned out to be a strong winner, indicating a bullish trend going forward. The ETF outperformed SPY by roughly 160 bps thanks to strong earnings from most of the banking stocks (read: Two Sector ETFs Posting Incredible Gains).
Bank Stocks in Focus
Banks have shown an impressive comeback following a series of hedging losses and scandals, surging almost 200% over the last four years. This strong performance was attributable to sound balance sheets, an uptick in mortgage activity, and lower loss provisions.
Still, investors should note that though the banking industry has outperformed the other sectors, it is still 50% below its 2007 record high. This suggests that even with the recent surge, the banking sector has plenty of room to run, and can still be a great value at this level (read: Banking ETFs 101).
For investors seeking to make a play on this segment, there are several ETFs available. In particular, we would like to highlight two funds which have seen double digit returns so far in 2013, as these could continue to be leaders heading into Q2:
SPDR S&P Bank ETF (KBE)
Launched in Nov 2005, this fund seeks to match the performance of the S&P Banks Select Industry Index while charging investors 35 bps in fees a year. It has a nice mix of all cap securities with 42% in mid caps, 32% in large caps, and the rest in small cap stocks.
The fund holds 43 securities in the basket, and it is widely spread out thanks to equal weighting. First Niagara Financial (FNFG), Commerce Bancshares (CBSH) and Bank of America (BAC) take the top three spots with 2.6% of the assets each. This equal allocation strategy prevents a heavy concentration as the top 10 holdings get a roughly 25.4% share.
Within the sector, regional banks account for two-thirds of KBE while thrifts & mortgage finance, diversified banks, other diversified financial service, and asset management and custody banks take the remaining portions in the portfolio (read: Time to bank on Regional Bank ETFs?).
Unsurprisingly, this structure results in a value tilt for KBE. The product has been able to amass over $2 billion in its asset base and boasts an average daily volume of more than 1.4 million shares. This ensures a relatively tight bid/ask spread, keeping the total cost low for this fund.
In terms of performance though, the ETF gained a stellar 22.74% in 2012 and 13.01% so far in the year, but it has a long way to go to catch the highs of 2007. The fund is still trading 55% below that level and pays a decent 1.84% in annual yield.
KBE currently has a Zacks Rank of 3 or ‘Hold’ with a Medium risk outlook.
PowerShares KBW Bank ETF (KBWB)
This banking ETF tracks the KBW Bank Index, which measures the performance of the leading national money centers and regional banks or thrifts. The product is less popular than the State Street counterpart with AUM of $105.8 million and trading volume of 660,000 shares per day.
The ETF holds a fairly small portfolio of 24 securities, honing in on large cap growth stocks. The top ten holdings play a dominant role in the fund’s performance as nearly 60% of the asset base goes towards them.
Among individual holdings, industry behemoths like Bank of America, Citigroup (C - Free Report) and JP Morgan Chase (JPM - Free Report) take up the top three holdings in the fund, while Wells Fargo (WFC) occupies the fourth position.
Launched in 2011, the fund charges 0.35% in expenses for its portfolio from investors. KBWB has exhibited a strong performance as depicted by its returns of 32.20% in 2012 and 10.73% year-to-date (read: What is Driving Bank ETFs Higher?). The product has recently made a new high of $29.57 and yields a decent 1.15% in annual dividends.
The ETF currently has a Zacks Rank of 1 or ‘Strong Buy’ with a Low risk outlook.
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