Banking Fund Offers Sector Diversification

The SPDR S&P 500 Bank Fund ETF (KBE) combines two different ideas into one solution.

Many exchange-traded funds (ETFs) that target a specific sector focus on well-known names to attract interest of investors. However, there are some investors who are more interested in funds that provide exposure beyond the typical large-cap stocks in the market.

KBE’s marriage of these two ideas comes as a result of its equal-weighted approach to the banking stocks it holds. This means that an investment in KBE offers easy exposure to large-, mid- and small-cap banks in significant amounts.

Admittedly, this makes the fund potentially riskier than some ETFs, but also more interesting. For instance, unlike a more focused ETF such as the SPDR S&P Regional Banking ETF (KRE), KBE offers investors access to a wide array of companies and sub-industries in its portfolio. This list includes: asset management & custody banks, diversified banks, regional banks, other diversified financial services, and thrifts & mortgage finance. Diversification is one of the most appealing points of many ETFs, and KBE is a great example of this appeal.

Also, the relative performance of this fund is quite interesting. Year to date, with a gain of just 0.76%, the fund has greatly underperformed both the S&P and the best-known financial ETF, XLF. However, over a 12-month scope, it has dramatically beaten both by posting a 37% gain, compared to just 6.5% for XLF and 14.2% for the S&P. Interested investors can also pick up a 1.36% dividend here, set against an expense ratio of 0.35%. Assets under management for this fund total $3.25 billion.

Because this fund uses an equal-weighting strategy, its top holdings are essentially arbitrary. More interestingly, the fund has 77.5% of assets in regional banks, about 10% in diversified banks, 7% in thrifts and mortgage finance, 4% in asset management and custody banks and 2% in other diversified financial services. This heavy weighting in the regional bank sector should be noted by any investor who is serious about possibly investing in this ETF.

For those looking for a less-typical way to gain exposure to the financial sector, the SPDR S&P 500 Bank Fund ETF (KBE) is an investment vehicle that could prove to be useful.

Jim Woods

Jim Woods is a 20-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor. Jim is the editor of Intelligence Report, Investing Edge, the Bullseye Stock Trader, and The Deep Woods (formerly the Weekly ETF Report). His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. His articles have appeared on many leading financial websites, including StockInvestor.com, InvestorPlace.com, Main Street Investor, MarketWatch, Street Authority, Human Events and many others. Jim formerly worked with Investor’s Business Daily founder William J. O’Neil, helping to author training courses in the CANSLIM stock-picking methodology. The independent firm TipRanks rates Jim the No. 3 financial blogger in the world (out of more than 6,000). TipRanks calculates that, since 2012, he's made 361 successful recommendations out of 499 total, earning a success rate of 72% and a +15.3% average return per recommendation. He is known in professional and personal circles as “The Renaissance Man,” because his expertise includes such varied fields as composing and performing music; Western horsemanship, combat marksmanship, martial arts, auto racing and bodybuilding. Jim holds a BA in philosophy from the University of California, Los Angeles, and is a former U.S. Army paratrooper. A self-described “radical for capitalism,” he celebrates the virtue of making money from his Southern California horse ranch.