ETF Talk: U.S. Banks Could Climb after Fiscal Cliff Resolution

Doug Fabian

Doug Fabian is known for his expert knowledge of ETFs, bear funds and enhanced index funds to profit in any market climate.

Bank stocks have risen during the past year and they still may have further gains ahead. But a major factor impeding continued growth is the uncertainty of the still-unresolved fiscal cliff. Once that uncertainty is resolved, though, look for U.S. banks to rise strongly. With this potential bullishness on banks in mind, now would be a good time to prepare to take action when Washington lawmakers address the fiscal cliff. One bank exchange-traded fund (ETF) that I want to bring to your attention is SPDR S&P Bank ETF (KBE).

This non-diversified fund seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P Banks Select Industry Index, which tracks the performance of publicly traded national money center and leading regional banks. KBE generally invests at least 80% of its total assets in the securities that comprise the index.

Even with the fiscal cliff looming, KBE is up 18.8% year-to-date. The worldwide rebound from the crash of a few years ago likely is responsible for a least a portion of this growth. However, banks also have benefitted from an improved housing market this year. When politicians settle on what to do about the fiscal cliff, the uncertainty regarding the resolution will disappear. At that point, bank stocks like those in KBE could begin to resume their climb.

Predictably for an ETF with “Bank” in its title, KBE is 100% invested in the financial sector. And 99.77% of its holdings are stocks. However, no individual stock comprises more than 4% of KBE’s total investments. In fact, only the top holding, Ocwen Financial Corporation, with 3.60%, consists of more than 3% of the fund’s overall portfolio. The next four top KBE holdings, followed by their percentage of the fund’s total assets, are: CapitalSource Inc Common Stock, 2.96%; Popular, Inc., 2.90%; Bank of America Corporation Com, 2.83%; and M&T Bank Corporation Common Stock, also with 2.83%. The top ten holdings, totaled, only make up 28.92% of KBE’s assets.

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Recent trends indicate that the financial sector will continue to improve. Once the fiscal cliff is resolved, expect U.S. banks and bank funds, such as KBE, to be in a good position to continue trading higher.

If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my Successful Investing newsletter. As always, I am happy to answer your questions about ETFs, so do not hesitate to email me by clicking here. You may see your question answered in a future ETF Talk.

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