Zions Stress Test Failure Shouldn’t Hurt These ETFs

March 21st at 10:00am by Todd Shriber

On Thursday, the results of the Federal Reserve’s stress tests on U.S. banks with $50 billion or more in assets were generally positive.

Twenty-nine of the 30 banks tested, including those that are major components in popular financial services exchange traded funds, such as the Financial Select Sector SPDR (NYSEArca: XLF), passed. The lone failure was Utah-based Zions Bancorp (NasdaqGS: ZION).

Zions “slid to a loss in the fourth quarter as it booked hefty charges related to losses on investment securities and other one-time items,” Reuters reported.

Investors in regional bank ETFs that hold shares of Zions need not fret for a few reasons. First, the stock is not large enough to alone determine the fate of any of the ETFs of which it is a member. Secon, several of the ETF’s of which Zions is a member are chock full of either regional banks that have recently been strong, were not subjected to the stress test or were among the 29 banks that did pass.

Think the SPDR S&P Bank ETF (NYSEArca: KBE) of which Zions is a top-10 member, but with a weight of just 2.1% or the SPDR S&P Regional Banking ETF (NYSEArca: KRE). The $2.5 billion KRE is up 12% in just the past month. [Regional Bank ETFs Soar]

The PowerShares KBW Bank Portfolio (NYSEArca: KBWB) features a 4.1% weight to Zions while the First Trust NASDAQ ABA Community Bank Index Fund (NasdaqGM: QABA) allocates 3.8% to the stock, making it the ETF’s second-largest holding.

Neither ETF should be punished for Zions exposure. While 13 stocks account for at least 4% of KBWB’s weight, all that were tested by the Fed except Zions passed. Additionally, as is the case with the likes of XLF and KBE, KBWB could benefit next week when the Fed’s annual Comprehensive Capital Analysis and Review (CCAR) program reveals results that will show which banks can boost dividends and buybacks. [ETFs for Rising Bank Dividends]

Nearly every stock ahead of Zions in KBWB’s lineup is expected to be granted permission by the Fed for some form of enhanced shareholder rewards.

In the case of QABA, the ETF’s Zion’s exposure is not a problem because the ETF is heavily allocated to a broad swath of smaller regional banks that are financially sturdy. In fact, the ETF is one of the better avenues for gaining access to some of the better-performing mid-cap California-based regional banks. [High-Flying Community Bank ETF]

QABA is up 10% in the past month and both it and KBWB hit new all-time highs Thursday.

First Trust NASDAQ ABA Community Bank Index Fund

Tom Lydon’s client own shares of KRE.