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A Sense of Community, Banks That is, With This ETF


Perhaps betrayed by its name, the First Trust NASDAQ ABA Community Bank Index Fund (QABA) goes overlooked compared to other financial services exchange traded funds.

With “community bank” dwelling in its name, it is easy to understand why skittish investors might skip over QABA in favor of a more traditional bank ETF that is loaded with institutions that are perceive to be financially sturdier than QABA’s 135 holdings. [A Look at Community Bank ETFs]

After all, nearly 300 banks, mostly of the community variety, failed in 2009 and 2010 combined. That was followed by another 92 in 2011, but that number fell dramatically to just 24 last year.

There are factors to consider with QABA, not the least of which is the ETF’s 31.4% gain over the past year, which is on par with that of some traditional regional banking ETFs and superior to that of funds littered with large-cap national banks.

While QABA’s holdings have a median market value of $663 million, which is distinctly small-cap, the ETF does not lack for financially sound banks that could currently be offering investors upside potential. Constituent companies must have market values of at least $200 million and average daily volume of at least $500,000.

On Monday, we highlighted the potential of mid-cap California banks with exposure to the state’s metropolitan areas. Keefe, Bruyette and Woods says a “brisk real estate market recovery and improving economic fundamentals” in the state’s metro areas make the firm constructive on California’s mid-cap banks this year.

KBW went on to note that “Relative to other regions in the U.S., we believe that, as a group, larger community banks in metropolitan California are better positioned to deliver attractive growth and profitability for investors.”

The research firm’s top ideas among California banks include SVB Financial (SIVB), PacWest Bancorp (PACW), Cathay General (CATY), CVB Financial (CVBF), East West Bancorp (EWBC) and First Republic (FRC) with the top idea being Los Angeles-based PacWest Bancorp. [The Right ETF for California Banks]

California banks that KBW spoke favorably of combine for almost 12% of QABA’s weight with SVB Financial and East West Bancorp ranking as the ETF’s third- and fourth-largest holdings, respectively, combing for 7% of the fund’s weight.

QABA’s three-standard deviation and beta are slightly below that of the S&P Composite 1500 Financials Index and banks “must meet certain operating history, solvency, and financial statement requirements to remain eligible for inclusion in the index,” according to First Trust.

First Trust NASDAQ ABA Community Bank Index Fund