It was no surprise that our weekly Quant
Movers report looked a little “schizophrenic” after Friday’s panic-induced
Treasury rout from another stellar Job’s report.
As the “risk-off” trade sparked strong selling across all asset classes,
some of the biggest quant gainers for the week made for a mismatched list of
market neutral, covered call and low volatility products with no clear trend to
follow. But there was one standout
amidst the bloodletting last Friday, the PowerShares KBW Capital Markets
Portfolio (KBWC). As the potential for a rising rate environment finally
provides a much needed lift to the financial sector where profitability has
long been constrained by tight interest rate spreads. While it
might be early to declare victory for the financials, the momentum shift does
have us wondering if it’s time to get serious about bank stocks.
After showing so much promise last December when the
on-going rally in low volatility sectors seemed to finally spillover to the
financials, the sector fell flat on its face in January as traders and
economists squared off on when rates might finally begin to rise in the U.S. Constrained by low net interest margins, weak
loan growth and stricter regulations that have all conspired to keep ROA close
to historic lows, banking stocks (especially regional bank stocks that lack a
trade desk) were the wallflowers in January with the Financial Sector Select
SPDR down 6.96% and the KBW Regional Bank Index SPDR (KRE) down 9.46% to the
S&P 500’s 3.1% loss. How the worm
turned last Friday with KRE gaining .77% compared to XLF’s -.74% and the
S&P’s -1.42% performance on the day.
KRE wasn’t the only fund to see big gains on the day, the iShares U.S.
Regional Banks ETF (IAT) and SPDR S&P Bank ETF both managed to deliver
positive returns on the day.
The secret to their success is a formula familiar to investing greats like Warren Buffet; community and regional bank
names that dominate their home markets through a strong footprint but rely on
loans and investment/trust services to generate revenue. Pittsburgh’s own PNC Group (PNC) fits neatly
into this category along with BB&T Corp (BBT) and SunTrust Banks (STI) that
have long battled each other for supremacy in the states of the old
Confederacy. Besides having similar
asset bases and extensive geographic footprints, the three banks are common
holdings across the regional bank ETF market and were up over 1% on Friday (PNC
and BBT were up 1.29%, STI was up 1.7%) as investors interpreted the potential for
rate hikes as early as this June as positive for those strong regional
players. That regional focus for KRE and
IAT (where these three banks make up 25% of the allocation) helps explain a
significant portion of Friday’s performance differential when compared to XLF’s
more lackluster showing. IAT’s average
market cap is $14.9 billion compared to $66.1 billion for XLF.
And if a little smaller is good, than a lot smaller must
be better right? Investors looking for a
bigger bang for their buck as rising return on assets and leverage boost return
on equity back to historic norms might consider the First Trust NASDAQ ABA
Community Bank ETF (QABA.) With an average market cap of only $1.6 billion and
many of the 143 banks are located within a single state they were among the
hardest hit by the consumer balance sheet recession of the last five
years. Investors worried about the risks
that they’ll be acquiring besides geographic risk if they add QABA to their
portfolio’s should look at our Red Diamond Risk scores; QABA currently sports
an ETFG Red Diamond Risk rating of 2.82, one of the lowest among the bank stock
ETF’s we’ve talked about today thanks to lower volatility and deviation scores. But investors should note that those lower
scores may be due to much lower transaction volumes for underlying holdings
compared to either regional players like PNC or national operations like Citi.
Thank you for reading ETF Global Perspectives!
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