Despite the sluggish economic environment which has led to deceleration in overall credit growth, the banking industry has come back strong in 2012. This has happened as many firms have been able to increase top line revenues and boost margins, while expectations are also rising heading into the New Year as well.
This has come despite the doubled-edged sword of the low interest rate policy of the Federal Reserve which has both helped and hurt banks across the nation. Likely, the policy has squeezed profit margins, but as also helped to move lending volumes out of the doldrums while investment portfolios have also performed admirably too.
However, the housing sector recovery, the unexpected increase in consumption by the U.S. consumers coupled with lowered borrowing cost is expected to give a boost to lending volumes.
Regardless of this, high provisioning could lead to margin pressures in the upcoming quarters as well and keep net interest income at depressed levels. However, non fund based fee income along with strong capital positions are the key positives for the sector going forward (read Commodity ETFs in Focus as Fed Unleashes QE3).
From a stock market performance perspective, the financial sector has been leading the market rally in the S&P 500 so far this year. Furthermore, from an earnings perspective, the financial sector has clearly been one of the best performing sectors in the third quarter earnings season.
Most of the companies that have reported their earnings have beaten the consensus estimates while posting positive growth in revenue as well as earnings and the trend is most likely to continue in the upcoming quarters as well (read Banking ETFs 101).
Given these factors, a look at a Zacks #1 Ranked Financial ETF could be a winning choice for investors, especially if the positive trend in earnings for the sector continues through the present earnings season.
About the Zacks ETF Rank
A look at top ranked Financial ETFs can be done by using the Zacks ETF Rank. This technique provides a recommendation for the ETF in the context of our outlook of the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors as well.
The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks Rank reflects the expected return of an ETF relative to other ETFs with similar level of risk.
Using this strategy, we have found one ETF which is Ranked 1 or ‘Strong Buy’, which we have highlighted in greater detail below:
PowerShares KBW Regional Banking ETF (KBWR)
In existence for just over a year, KBWR is a relatively new fund being launched in November of 2011. The ETF tracks the KBW Regional Banking Index which tracks the performance of all U.S listed regional banks. The index weighs its components equally and is maintained and weighted by Keefe, Bruyette & Woods, Inc.
Presently the ETF has a portfolio of 50 stocks. KBWR does well in eliminating concentration risk as it does not allocate much to any single component. In fact, Texas Capital Bancshares Inc, is its highest weighted stock with just 3.70% of the total.
Some of the other stocks in its portfolio are Susquehanna Bancshares Inc (3.56%), First Republican Bank, (2.82%) and Webster Financial Corp, (2.79%) (read Financial ETFs in Focus as Pandit Quits Citigroup).
KBWR is up by almost 12.5% year till date as of 5th November 2012. However, from a one year look, it seems to have fared even better. The ETF has returned 18.6% on a one year basis as of the same date.
Since its inception almost a year back, the ETF has managed to amass an asset base of $17.89 million, charging investors 35 basis points in fees and expenses (see more in the Zacks ETF Center). KBWR does an average daily volume of about 18,500 shares.
From a risk perspective, the ETF can be considered relatively less risky, especially compared to its other financial counterparts. KBWR has an annualized standard deviation of just 22.15% since its inception. This is reflected in our ‘Low’ risk outlook for the ETF along with a Zacks ETF Rank of 1 or ‘Strong Buy’ over the next 12 months.
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