First Trust Advisors L.P., the manager of a popular line of more than 35 ETFs, has announced that its newest fund, the NASDAQ ABA Community Bank Index Fund, will begin trading on the NASDAQ exchange on July 1. The new ETF will trade under the ticker QABA and have an expense ratio of 0.60%. The index tracked by the new ETF is a market capitalization-weighted benchmark that will hold stocks of all NASDAQ-listed banks and thrifts, except:
- Any of the 50 largest banks (based on asset size)
- Any bank having an “international specialization” based on data compiled by the FDIC
- Any bank having a “credit card specialization”
Banks and thrifts must also meet two size/liquidity thresholds to be eligible for inclusion in the index: (1) market capitalization of at least $200 million and (2) three-month average daily trading volume of at least $500,000. At present, there are approximately 96 stocks comprising the index.
Unlike global banking behemoths, community banks focus on activities that traditionally come to mind when thinking of banking activities: accepting deposits and making mortgage and commercial loans. As such, while there are dozens of existing ETFs offering exposure to various corners of the financial sector, QABA will be unique because it will focus on smaller financial institutions that have fundamentally different operations from international banking giants.
“There has been little distinction made between the stress-tested megabanks and the nearly 8,000 community banks throughout the country,” noted Robert Carey, CFA, First Trust’s Chief Investment Officer. “Because these banks tend to practice more conservative banking strategies and have tended to stay away from subprime lending and exotic financial instruments, they have recently shown higher capital levels and healthier balance sheets as compared to larger financial institutions.”
At a time when lending by the largest players in the financial industry is still hampered by capital requirements, community banks are accounting for a larger portion of small business loans. Because they generally did not invest in the complex financial instruments that were at the epicenter of the financial crisis, many community banks still have relatively strong balance sheets, and many have gone about business as usual over the last year.
|Fund||Ticker||Holdings||Median Market Cap||YTD Return|
|SPDR KBW Bank ETF||KBE||24||$5.5 billion||-18.2%|
|SPDR KBW Regional Banking ETF||KRE||50||$635 million||-36.1%|
A brief analysis of two of the more popular existing bank ETFs, KBE and KRE, highlights the differences between community banks and larger regional and international financial institutions. KBE and KRE hold companies with median market capitalizations of $5.5 billion and $635 million, respectively, while QABA will have several holdings smaller than $500 million. KBE’s main holdings include Bank of America, JP Morgan Chase, and Wells Fargo, while KRE holds regional banks such as Bank Hawaii and BancorpSouth. By contrast, QABA will seek to replicate the performance of banks and thrifts that operate exclusively in a single market, often small, rural communities. Because of this, another key difference between QABA and existing bank ETFs is the number of individual holdings. Since the operations of community banks are often concentrated in small geographic area, diversification of risk is required to make an attractive, meaningful benchmark. QABA will initially have 96 holdings, four times the amount of KBE and nearly twice the number of holdings of KRE.
Disclosure: No positions at time of writing.