The Invesco KBW Bank ETF (KBWB ) is up 29% year-to-date, but that statistic, impressive as it is, doesn’t tell the entire story.
Since May, KBWB and other bank equity exchange traded funds have been trading mostly sideways. Some analysts believe that the group is poised to snap its lethargic ways and build on the upside accrued earlier this year. This means that sparks could be on the way for KBWB, which tracks the KBW Nasdaq Bank Index.
“The environment for financials appears to be improving and the catalyst for performance from higher lending, a steeper yield curve and lower provisioning charges pushes us to raise the weighting back to bullish,” says Jefferies Global Equity Strategist Sean Darby.
The $2.84 billion KBWB is home to 26 bank stocks, predictably giving the fund a heavy value tilt. Roughly 69% of the ETF’s holdings are classified as value stocks, meaning that KBWB is well-suited for a cyclical value resurgence.
Owing to the construction of many lenders’ loan portfolios, KBWB could also prove to be an inflation-fighting tool for investors.
“With the typical loan portfolio composition of a U.S. bank comprised of about 23% commercial lending, 20% residential lending and about 15% commercial real estate loans, a jump in producer prices, home prices and stabilizing in commercial real estate prices have improved the health of the overall lending portfolio of banks,” reports Steve Gelsi for MarketWatch.
Another potential catalyst for KBWB is that with the economy improving, which is allowing banks to repatriate loan loss reserves back into usable capital, banks could actually get back to business. That would be notable because, as Jeffries’ Darby notes, loan growth has been sluggish over the past couple of years while deposits are surging.
“Wall Street investors are starting to recognize that both tapering and the rate cycle are appearing on the horizon, even as U.S. bank shares have treaded water alongside stable forward earnings revisions,” MarketWatch reports, citing the Jefferies strategist.
JPMorgan Chase (NYSE:JPM), a member of the Dow Jones Industrial Average, Bank of America (NYSE:BAC), and Wells Fargo (NYSE:WFC) combine for nearly a quarter of KBWB’s weight. The fund’s holdings range in weights from 1.09% to 8.23%.
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