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Bank ETFs Hurt by the Dovish Fed

Zacks Equity Research

The hope of another rate hike in the near term took a nosedive after Federal Reserve Chair Janet Yellen stated that the U.S. central bank should proceed cautiously in adjusting policy rates. Yellen’s dovish comments were in stark contrast to several Fed officials who last week hinted at a sooner-than-expected rate hike, potentially in April or June.

 

While addressing the Economic Club of New York, Yellen noted that only gradual increases in the federal funds rate are likely in the coming years. She cited an uncertain economic environment, the employment scenario and inflation goals for the extremely cautionary stance. Appropriately, a gradual pace of rate hikes will be established to achieve and maintain two primary criteria – maximum employment and an inflation rate of 2%.

 

Yellen also highlighted changes in the economic environment since December, when the Fed raised rates for the first time in nearly a decade. She noted that since the beginning of the year, readings on the U.S. economy have been mixed. While many indicators including labor market data, declining unemployment rate, moderate expansion of consumer spending and housing market recovery were favorable, a continued decline in manufacturing and net exports owing to slow global growth and the significant appreciation of the dollar can’t be ignored. The continued slump in oil prices has also impacted the economy adversely (read: US Hires More than Expected in Feb: ETFs & Stocks to Buy).

 

In light of these considerations, it is not surprising that the Federal Open Market Committee (FOMC) decided to leave its stance on policy unchanged in both January and March. In March, the central bank announced that it now expects the federal funds rate to rise to 0.875% by the end of the year, instead of the previously expected 1.375%, implying only two rate hikes as compared to the four projected in December (read: ETFs to Watch Post Fed Meeting).

 

As the rates are likely to remain low longer than expected, financials stocks and ETFs have turned up as the major losers. In fact, with Treasury yields hitting multi-week lows after the release of Yellen's remarks, banks are expected to be the worst hit. Low rates put pressure on banks’ net interest margin – a measure of the difference between the rates at which banks borrow and lend. KBW NASDAQ Bank Index went down 2.8% in the last five days.

 

As per an analyst at CLSA, the Fed’s dovish stance is expected to cost the U.S. banking industry about $5 billion. In this scenario, let’s look at a few prominent U.S. bank ETFs and their performance (see all Financial ETFs here).

 

SPDR S&P Bank ETF (KBE)

 

This fund tracks the S&P Banks Select Industry Index and has an AUM of $2.3 billion. Volume is good as it exchanges more than 2.9 million shares a day while the expense ratio is at 0.35%. The product holds a diversified basket of 64 stocks with none holding more than 2.2% of total assets (read: Bank ETFs in Trouble?).

 

From a sector look, about three-fourths of the portfolio is allotted to regional banks while diversified banks, thrifts & mortgage finance, asset management & custody banks and other diversified financial services take the remainder. KBE currently has a dividend yield of 1.92%. The ETF has lost 2.5% in the last five days and holds a Zacks ETF Rank #2 (Buy) with a High risk outlook.

 

SPDR S&P Regional Banking ETF (KRE)

 

Like KBE, KRE is also a popular ETF in the banking space with AUM of nearly $1.9 billion and average daily volume of more than 6.3 million shares. The product follows the S&P Regional Banks Select Industry Index and charges 35 basis points a year in fees. Holding 101 securities in its basket, the fund is widely spread out across each security with none holding more than 2.7%. From a sector look, regional banks hold the most weight. KRE has a dividend yield of 2.04% and has lost 2% in the last five days. The fund holds a Zacks ETF Rank #2 with a High risk outlook.

 

iShares U.S. Regional Banks ETF (IAT)

 

This ETF offers exposure to 54 regional bank stocks by tracking the Dow Jones U.S. Select Regional Banks Index. The fund has concentration risk with the top three funds holding more than one third of its assets. From a sector look, regional banks dominate with diversified banks and thrifts & mortgage finance rounding off the top three spots. The fund has amassed $412.7 million in its asset base and sees volume of 306,000 shares a day. It charges 44 bps in annual fees and is down 2.1% in the last five days. The fund has a dividend yield of 1.64% and holds a Zacks ETF Rank #2 with a High risk outlook (read: Regional Bank ETFs Face Off on Rate Hike Buzz).

 

PowerShares KBW Bank Portfolio (KBWB)

 

The fund tracks the KBW Nasdaq Bank Index. The fund has amassed $327.5 million in its asset base and sees volume of 367,000 shares a day. It charges 35 bps in annual fees and has a dividend yield of 1.78%. The fund has 24 securities in its basket with the top three stocks holding almost one-fourth of the weight. It has a dividend yield of 1.78%. KBWB is down 2.7% in the last five days and holds a Zacks ETF Rank #3 (Hold) with a High risk outlook.

 

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SPDR-KBW BANK (KBE): ETF Research Reports
 
SPDR-KBW REG BK (KRE): ETF Research Reports
 
ISHARS-US RG BK (IAT): ETF Research Reports
 
PWRSH-KBW BP (KBWB): ETF Research Reports
 
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