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Bank ETFs to Ride High on the Holiday Shopping Spree

Sweta Jaiswal, FRM

A hearty consumer spending has been adding stimulus to the banking sector. This phenomenon was reflected in third-quarter earnings as well. In fact, analysts were of the opinion that credit cards had helped boosting the earnings results. Moreover, RBC Capital’s Markets analyst Gerard Cassidy believes that a resilient US consumer spending coupled with a solid economy will continue to back the banking sector. He expects these tailwinds to sustain in 2020 as well. Notably, the banking sector has outperformed the broader market in 2019 to date. The KBW Bank Index has surged 33% compared with the 29% gain of the S&P 500 Index in the year-to-date period (Why Bank ETFs Are Rising).

Gaining traction from the upbeat holiday season in 2019, large banks like JPMorgan Chase & Co. JPM, Bank of America Corp. BAC and Citigroup Inc. C also rose to their new highs on Dec 26. In fact, Bank of America scaled to its highest level since October 2008 after inching up around 1% on Dec 26. Citi also touched its maximum mark since January 2018 after rising 1.5%. The gains were largely owing to the e-commerce giant Amazon’s AMZN announcement of witnessing a record-breaking holiday shopping season (read: Nasdaq Hits 9,000 for the First Time: ETFs to Benefit).

The Holiday Sales

Per a Mastercard Spending Pulse survey, holiday sales increased 3.4% year over year. Moreover, there was an 18.8% year-over-year rise in the online sales, highlighting the change in consumer’s shopping pattern. The survey tracked sales from Nov 1 through Dec 24. It covered transactions that were completed using Mastercard’s network of payments systems, which also included estimated cash purchases and other modes of payments. However, the survey excluded the automobile sales.

Bank ETFs: Will the Rally Remain?

The banking space of the broader financial segment has been on a roll, buoyed by better-than-expected earnings, bargain hunting and the steepening of the yield curve. Also, the upbeat jobs and encouraging manufacturing updates are hinting at a wealthier economy. Per Federal Reserve’s recently-released data, the manufacturing sector, accounting for 11% of the U.S. economy, witnessed a 1.1% rise in output during November against 0.7% dip in October. Industrial output also inched up 1.1% in November versus the 0.9% slip in October.

The favorable U.S. homebuilders’ sentiment data for December also cheered investors. The metric hit an all-time high since June 1999. Moreover, the data on U.S. housing starts, new home sales and building permits has been encouraging.

These factors seem to be painting 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 — Up 23.4% year to date

This fund, having an AUM of $2.08 billion and average trading volume of 6 million shares, offers exposure to regional banks. It follows the S&P Regional Banks Select Industry Index, charging investors 35 basis points a year in fees. Holding a basket of 122 securities, the fund is widely spread out with each security holding less than 2.9% of the assets.

SPDR S&P Bank ETF KBE – Up 25.1%

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 74.1% share while thrifts & mortgage finance, diversified banks, other diversified financial services, and asset management & custody banks take the remainder. It has amassed $1.83 billion in its asset base while trading in heavy volume of 1.8 million shares a day on average. The product charges 35 bps in annual fees (read: 3 Reasons to Bet on Bank ETFs Now).

Invesco KBW Bank ETF KBWB — Up 30.2%

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 7% share each. The fund has managed $608.6 million in its asset base and trades in a solid volume of 367,000 shares per day on average. Expense ratio comes in at 0.35% (read: Follow Morgan Stanley to Trade 2020 Election With ETFs).

First Trust Nasdaq Bank ETF FTXO — Up 24.9%

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 8.2% share. The ETF has AUM of $144.5 million and trades in average daily volume of 52,000 shares. It charges 60 bps in annual fees.