KBE: Regional Banks At Risk For Continued Underperformance

seekingalpha05-25

ilbusca/E+ via Getty Images Investment Thesis SPDR S&P Bank ETF (NYSEARCA:KBE) is a hold due to several concerning factors regarding the fund, including its heavy concentration on regional banks. ...

Source Link

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

Comments

We need your insight to fill this gap

Leave a comment

{"i18n":{"language":"en_US"},"isChannel":false,"data":{"share":"https://ttm.financial/m/news/2438068419?lang=en_US&edition=fundamental","thumbnail":"https://static.seekingalpha.com/cdn/s3/uploads/getty_images/157419147/image_157419147.jpg","is_english":true,"pubTime":"2024-05-25 00:37","share_image_url":"https://static.laohu8.com/e9f99090a1c2ed51c021029395664489","id":"2438068419","market":"nz","top_or_hot":-1,"title":"KBE: Regional Banks At Risk For Continued Underperformance","media":"seekingalpha","content":"<div>\n<p>ilbusca/E+ via Getty Images Investment Thesis SPDR S&P Bank ETF (NYSEARCA:KBE) is a hold due to several concerning factors regarding the fund, including its heavy concentration on regional banks. ...</p>\n\n<a href=\"https://seekingalpha.com/article/4695531-kbe-regional-banks-at-risk-for-continued-underperformance\">Source Link</a>\n\n</div>\n","source":"seekingalpha_fund","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>KBE: Regional Banks At Risk For Continued Underperformance</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nKBE: Regional Banks At Risk For Continued Underperformance\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-05-25 00:37 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4695531-kbe-regional-banks-at-risk-for-continued-underperformance><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>ilbusca/E+ via Getty Images Investment Thesis SPDR S&P Bank ETF (NYSEARCA:KBE) is a hold due to several concerning factors regarding the fund, including its heavy concentration on regional banks. ...</p>\n\n<a href=\"https://seekingalpha.com/article/4695531-kbe-regional-banks-at-risk-for-continued-underperformance\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0496365809.HKD","symbol_name":"TEMPLETON GLOBAL INCOME \"A\" (HKD) INC (Q)","start_time":0,"source_url":"https://seekingalpha.com/article/4695531-kbe-regional-banks-at-risk-for-continued-underperformance","article_id":"2438068419","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/157419147/image_157419147.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2438068419","pubTimestamp":1716568647,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"ilbusca/E+ via Getty Images Investment Thesis SPDR S&P Bank ETF (NYSEARCA:KBE) is a hold due to several concerning factors regarding the fund, including its heavy concentration on regional banks. Whil","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"LU0496365809.HKD":"TEMPLETON GLOBAL INCOME \"A\" (HKD) INC (Q)","BK4553":"喜马拉雅资本持仓","BRK.B":"伯克希尔B","BK4585":"ETF&股票定投概念","BRK.A":"伯克希尔","BK4534":"瑞士信贷持仓","IE00B775SV38.USD":"NEUBERGER BERMAN US MULTICAP OPPORTUNITIES \"A\" (USD) ACC","LU0130103400.USD":"Natixis Harris Associates Global Equity RA USD","OZK":"欧扎克银行","BK4533":"AQR资本管理(全球第二大对冲基金)","LU1074936037.SGD":"JPMorgan Funds - US Value A (acc) SGD","LU0170899867.USD":"EASTSPRING INVESTMENTS WORLD VALUE EQUITY  \"A\" (USD) ACC","BK4566":"资本集团","CRBG":"Corebridge Financial, Inc.","LU0648001328.SGD":"Natixis Harris Associates US Equity RA SGD","LU1670627923.USD":"M&G (LUX) NORTH AMERICAN DIVIDEND \"A\" (USD) ACC","LU2552382058.USD":"WELLINGTON US BRAND POWER \"A\" (USD) ACC","BK4195":"互助储蓄与抵押信贷金融服务","VFH":"Vanguard Financials ETF","BK4559":"巴菲特持仓","LU2552382132.HKD":"WELLINGTON US BRAND POWER \"A\" (HKD) ACC","BK4550":"红杉资本持仓","LU1201861165.SGD":"Natixis Harris Associates Global Equity PA SGD","LU0980610538.SGD":"Natixis Harris Associates US Equity RA SGD-H","AX":"Axos Financial Inc","LU1201861249.SGD":"Natixis Harris Associates US Equity PA SGD-H","BK4207":"综合性银行","BAC":"美国银行","EQH":"Axa Equitable Holdings","LU1668664300.SGD":"Blackrock World Financials A2 SGD-H","BK6520":"工商业服务概念","BK4561":"索罗斯持仓","LU1670628061.USD":"M&G (LUX) NORTH AMERICAN DIVIDEND \"A\" (USD) INC","IE00B1XK9C88.USD":"PINEBRIDGE US LARGE CAP RESEARCH ENHANCED \"A\" (USD) ACC","LU0310800965.SGD":"FTIF - Templeton Global Balanced A Acc SGD","JXN":"Jackson Financial Inc","IE00B3S45H60.SGD":"Neuberger Berman US Multicap Opportunities A Acc SGD-H","IE00BKVL7J92.USD":"Legg Mason ClearBridge - US Equity Sustainability Leaders A Acc USD","KBE":"银行指数ETF-SPDR KBW","LU0256863811.USD":"ALLIANZ US EQUITY \"A\" INC","XLF":"金融ETF","LU0648000940.SGD":"Natixis Harris Associates Global Equity RA SGD","43A.SI":"伟盛有限公司","LU2552382215.SGD":"WELLINGTON US BRAND POWER \"A\" (SGDHDG) ACC","LU0048573561.USD":"FIDELITY AMERICA \"A\" (USD) INC","BK4176":"多领域控股","KBWB":"银行ETF-PowerShares","IE00B19Z3B42.SGD":"Legg Mason ClearBridge - Value A Acc SGD","FDN":"First Trust Dow Jones Internet I","LU0320765489.SGD":"FTIF - Franklin Mutual US Value A Acc SGD"},"translate_title":"KBE：区域银行面临持续表现不佳的风险","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"JXN":1,"XLF":1,"VFH":1,"OZK":1,"KBWB":1,"KBE":1,"EQH":1,"CRBG":1,"BRK.B":1,"BRK.A":1,"AX":1,"BAC":1,"FDN":0.9,"43A.SI":0.68},"content_text":"ilbusca/E+ via Getty Images Investment Thesis SPDR S&P Bank ETF (NYSEARCA:KBE) is a hold due to several concerning factors regarding the fund, including its heavy concentration on regional banks. While most regional banks have recovered from the early 2023 slew of failures, they still present multiple risk factors. By comparison, broader-based, diversified financial sector funds have seen better performance with lower volatility. This trend will likely continue given uncertainty regarding interest rate reductions, inflation control, and the elusive economic \"soft landing.\" Fund Overview and Compared ETFs KBE is a low-cost passively managed ETF that seeks to track the S&P Banks Select Industry Index. The fund therefore utilizes a modified equal-weighted index with the goal of providing investors with non-concentrated exposure across large, mid, and small-cap companies. With its inception in 2005, the fund has 92 holdings and $1.51B in AUM. By sub-sector, the fund is heaviest on regional banks (66.28%), followed by diversified banks (14.38%) and commercial and residential mortgage finance (8.42%). For comparison purposes, a similar fund examined is the Invesco KBW Bank ETF (KBWB) which is also focused on bank stocks but does not utilize the modified equal-weight index. It, therefore, is heavier on a large cap (56.49% weight) and lighter on a small cap (5.93% weight). To compare with the financial sector more broadly, Vanguard Financials Index Fund ETF Shares (VFH) and Financial Select Sector SPDR Fund ETF (XLF) were also examined. These broader-based funds are more diversified, including payment service companies, financial exchanges, insurance, and asset management companies. Funds Compared: Performance, Expense Ratio, and Dividend Yield KBE has seen a mediocre 10-year average annual return of 5.67% with a 10-year total price return of 43.8%. By comparison, KBWB performed slightly better, with a 10-year average annual return of 6.51%. Both funds have significantly underperformed broader financial sector funds, VFH and XLF, which have seen 10.44% and 10.63% average annual returns respectively. Looking forward, there are multiple reasons to believe that bank ETFs will continue to lag the broader financial sector, as I will discuss later. 10-Year Total Price Return for KBE and Peer Financial Sector ETFs (Seeking Alpha) In addition to stronger long-term performance, broader financial sector funds VFH and XLF also have lower expense ratios than KBE. At 0.35%, KBE ties Invesco's bank ETF for fees. One positive quality for KBE is its dividend yield at a solid 2.82% which has been growing with an 8.78% 5-year CAGR. Expense Ratio, AUM, and Dividend Yield Comparison     KBE KBWB VFH XLF   Expense Ratio 0.35% 0.35% 0.10% 0.09%   AUM $1.51B $1.56B $9.69B $39.70B   Dividend Yield TTM 2.82% 3.06% 1.85% 1.53%   Dividend Growth 5 YR CAGR 8.78% 7.15% 5.01% 4.04%   Click to enlarge Source: Seeking Alpha, 23 May 24 KBE Holdings and Key Outlook Factors Due to its modified equal-weight strategy, KBE holds the least weight on its top holdings at just 15.98%. By comparison, all other funds have at least 40% weight on their top 10 holdings. Additionally, while KBE contains some large-cap financial stocks such as Bank of America Corporation (BAC) and $Citigroup Inc(C-N)$. (C), it is heaviest on smaller holdings such as Jackson Financial Inc. (JXN), Corebridge Financial, Inc. (CRBG), and Equitable Holdings, Inc. (EQH). Top 10 Holdings for KBE and Compared Bank and Financials Funds   KBE - 92 holdings KBWB - 25 holdings VFH - 393 holdings XLF - 71 holdings   JXN - 1.81% GS - 8.76% JPM - 8.57% BRK.B - 13.05%   CRBG - 1.75% MS - 8.55% BRK.B - 8.03% JPM - 9.93%   EQH - 1.67% BAC - 8.32% MA - 5.84% V - 7.55%   AX - 1.62% WFC - 8.01% V - 5.49% MA - 6.53%   FCNCA - 1.58% JPM - 7.77% BAC - 4.07% BAC - 4.74%   BAC - 1.54% C - 4.22% WFC - 3.33% WFC - 3.80%   C - 1.53% TFC - 4.09% GS - 2.15% GS - 2.62%   VOYA - 1.50% FITB - 4.01% AXP - 2.11% SPGI - 2.46%   OZK - 1.50% MTB - 3.97% SPGI - 2.08% AXP - 2.38%   COOP - 1.48% PNC - 3.90% PGR - 1.88% MS - 2.18%   Click to enlarge Source: Multiple, compiled by author on 23 May 24 Looking forward, there are multiple headwinds for regional banks. This is problematic for KBE as it contains over 60% weight of regional banks. By comparison, VFH and XLF contain only 6.5% and 5.0% weight on regional banks respectively due to their broader indexes. These factors, discussed below, will likely continue to drag KBE back in performance compared to broader-based VFH and XLF. Regional Bank Difficulties In March 2023, Silicon Valley Bank, or SVB, collapsed, resulting in a significant decline in share prices for regional banks. Subsequently, Signature Bank and First Republic Bank also failed. SVB's failure was predominantly due to the bank keeping large amounts of cash in bonds that lost value as the Federal Reserve raised interest rates to combat inflation. Additionally, the bank invested heavily in tech startups, which saw steep losses during the COVID pandemic. Subsequently, while VFH saw an 11.2% decline in March 2023, KBE saw a 23.6% decline. While regional banks have generally recovered, they have lagged the broader financial sector since 2023. Timing of SVB Collapse With 3-Year ETF Performance (Seeking Alpha) While there has been no widespread regional bank failure contagion, regional bank vulnerabilities have remained. Higher interest rates help bank profitability, as banks profit from the difference in the rates they offer to customers compared to the return rate of their investments. As interest rates will likely be lower in coming years, the profitability from these higher interest rates may be squeezed. In contrast to regional banks, large and more diversified financial companies are less sensitive to interest rate fluctuations, as indicated by the share prices for financial funds since early 2023. Regional Problems Will Likely Persist Looking ahead, there are two reasons why issues in the financial sector might persist. The first reason is that mortgage rates will remain elevated compared to pre-2022 levels. This has resulted in a \"lock-in\" effect on homeowners. A survey by realtor.com offered that 82% of home buyers surveyed stated they felt \"locked in\" by their existing lower mortgage rate. Banks, including KBE's holdings, profit from new home purchase transactions, which are likely to be muted given this elevated mortgage interest rate. While the average 30-year mortgage rate is just below 7.0%, it is not expected to fall anytime soon to levels seen a few years ago. Axos Financial, Inc. (AX), for example, one of KBE's top holdings, offers residential mortgages and will be directly impacted by this mortgage rate environment. Forecast Mortgage Interest Rates (Freddie Mac, GS Global Investment Research) The second factor impacting smaller banks is the number of deposits they receive in interest-bearing accounts. In early 2020, money market fund inflows went up over 10% month-on-month. Current yields greater than 5% have kept deposits in high-yield savings accounts, including those offered by regional banks. However, as interest rates inevitably come down, bank outflows will likely occur as bonds, REITs, and dividend-paying stocks become more attractive comparatively. Another top holding for KBE, Bank OZK (OZK), for example, offers savings and money market accounts to individuals and businesses which will be directly impacted by a reduced federal funds rate. Comparative Strength of Broader Financial Sector In contrast to bank-heavy KBE, VFH holds only 6% weight on regional banks. Importantly, larger, more diversified financial holdings have demonstrated greater strength to weather the storms of interest rate fluctuations and recessions. Two holdings that demonstrate this resiliency are Berkshire Hathaway Inc. (BRK.A), (BRK.B) and JPMorgan Chase & Co. (JPM). While XLF holds 13% weight, Berkshire Hathaway, KBE does not have BRK.B as a holding. Few companies are as broadly diversified as Warren Buffett's multinational conglomerate. Berkshire Hathaway includes subsidiaries including Duracell, Dairy Queen, and Fruit of the Loom. From 1965 to 2022, Berkshire had a 19.8% compound annual growth rate. Therefore, the inclusion of BRK.B presents a distinct strength that is lacking from KBE. The second example of a strong holding is JPMorgan. KBE holds JPM at only 1.44% weight, while VFH and XLF have over 8% weight each. With consumer banking, investment banking, commercial banking, and asset management business segments, JPMorgan is broadly diversified in the financial sector, presenting a distinctive strength. Additionally, the company has seen 16.2% YoY revenue growth and is highly profitable with a 33.6% net income margin. Therefore, XLF and VFH are also more strongly postured, with their greater weight on JPM. Current Valuation As the stock market rally has broadened recently beyond information technology holdings, equal-weighted indexes have performed well. This benefited KBE, which has seen a one-year performance of over 30%. By comparison, VFH and XLF, which saw better long-term performance, have fallen behind over the past year. One Year Performance: KBE and Compared Financial Sector Funds (Seeking Alpha) Despite recent outperformance, KBE and peer KBWB have more attractive valuations than VFH and XLF. However, I do not see this as a buy signal for KBE. KBE's heavy concentration of regional banks presents risk factors looking forward that do not outweigh a better valuation. Valuation Metrics for KBE and Peer Banking and Financials ETFs     KBE KBWB VFH XLF   P/E ratio 10.50 11.37 15.40 15.99   P/B ratio 1.11 1.11 1.90 2.08   Click to enlarge Source: Compiled by Author from Multiple Sources, 23 May 24 Risks to Investors As discussed so far in this article, regional banks present multiple risks compared to larger, diversified financial holdings. While KBE has a modified equal-weighted approach, the fund still holds 66% of its weight on regional banks. As seen with Silicon Valley and Signature Banks, regional and smaller banks are more sensitive to interest rate fluctuations. While increased liquidity requirements are likely to aid in preventing future bank failures, risk factors that drive volatility remain. For an ETF, this volatility can be measured by standard deviation. KBE has a 5-year standard deviation of 31.14. By comparison, VFH has a 5-year standard deviation of 23.5, indicating that the more diversified fund experiences notably lower volatility. Concluding Summary  KBE warrants a hold rating, at best, due to its relatively heavy weight on regional banks. While there have not been widespread regional bank failures beyond the early 2023 collapses, the fundamental risk factors remain including interest rate sensitivity, the potential for account outflows, and lack of diversification. In contrast, broader-based funds such as VFH and XLF have seen stronger performance, lower volatility, and more affordable expense ratios. Despite a more attractive valuation for KBE, I anticipate broader financial funds such as VFH and XLF will continue to outperform looking forward.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2438068419"}