ETF Talk: Finding our Footing in Finance with This ETF

The pendulum, dear readers, has swung out and is now due to inevitably swing back in and potentially allow us all to breathe a bit easier. Word on the “Street” is that the Fed is likely to cut rates at its next meeting in September, as inflation has hit the Fed’s 2% target.

Now, with interest rates currently at the highest they’ve been in 15 years, the idea of investing in the financial sector may not sit so well with everyone. But to quote a fellow Renaissance man and investor, Rob Arnott, “In investing, what is comfortable is rarely profitable.”

But we are not focusing on the financial sector as a whole, we are focusing on a sliver of the financial sector: U.S. banking institutions.

Like any sector or subsector of the market there are risks involved in investing in U.S. banking institutions, but there are also some noteworthy strengths and one in particular — that would be the heavy regulation of all banks, which, thanks to the financial crisis of 2008-2009, is even more strict.

Further, banks are now required to maintain certain minimum capital levels, which act as somewhat of a failsafe and larger institutions are even required to submit to “stress testing” to determine their ability to survive in adverse environments, i.e., periods of inflation or recession. This type of heavy regulation can help to mitigate some of the risk associated with bank-stock investing.

But let’s delve even more specifically into one particular exchange-traded fund: SPDR S&P Bank ETF (NYSE: KBE).

KBE tracks an equal-weighted index of U.S. banking securities and generally will invest at least 80% of its total assets in such securities. The index represents the bank segment of the S&P Total Market Index and comprises the following sub-industries: Asset Management & Custody Banks, Diversified Banks, Regional Banks, Other Diversified Financial Services and Thrifts & Mortgage Finance.

As this fund is focused on such a narrow space, it may not be of much appeal for long-term investors, but it can be useful for establishing a tactical tilt toward financial stocks and provide investors with an efficient way to “bargain hunt” after large selloffs in financial stocks.

KBE has $2.03 billion in net assets, $1.8 billion in assets under management and a manageable expense ratio of 0.35%. Further, KBE has an impressive dividend yield of 2.73% and paid $1.35 per share in the past year. Its dividend is paid every three months, and the last ex-dividend date was June 24, 2024.

Courtesy of stockcharts.com.

As the chart above shows, KBE is in a consistently upward trend. In mid-July, the stock hit an all-time daily high of $54. Currently, it is trading a bit lower, but nothing it cannot recover from.

On Tuesday, Aug. 13, its price gained 1.23% and its volume increased as well, which is a positive technical sign for this ETF. Further, 683 more shares were traded than the day prior, and in total, two million shares were bought and sold for approximately $112.21 million.

Since this is such a concentrated fund, its top 10 holdings equate to 13.09% of its total assets, and these holdings include: The Bancorp, Inc. (TBBK), 1.48%; BankUnited, Inc. (BKU), 1.33%; Columbia Banking System, Inc. (COLB), 1.33%; Axos Financial, Inc. (AX), 1.31%; SouthState Corporation (SSB), 1.30%; First Financial Bankshares, Inc. (FFIN), 1.30%; Western Alliance Bancorporation (WAL), 1.29%; Independent Bank Corp. (INDB), 1.28%; Community Financial System, Inc. (CBU), 1.25%; and Ameris Bancorp (ABCB), 1.22%.

Ultimately, the financial sector, and more specifically U.S. banking institutions, can feel like a heady investment arena to jump into. And, while there is risk with any type of investing, we must ask ourselves if it feels like the right risk and KBE seems like it might have the potential to pay off well.

As I often do, I will leave you with a quote — one from a man who knows how to take a punch and understands that being knocked out does not equate to losing.

Marlon Moraes, a Brazilian former professional mixed martial artist, once said, “If you don’t risk, you can’t win. I don’t fear taking risks.”

As always, I’m happy to answer any of your questions about ETFs, so do not hesitate to email me. You may see your question answered in a future ETF Talk.