The May jobs report, which showed employers added 280,000 jobs last month, delivered the biggest employment gain of 2015. The unemployment rate fell to 5.4% from 5.5%.
Those headlines renewed calls for the Fed to boost borrowing costs this year with Fed funds futures showing a 53% chance of that happening following the central bank’s October meeting. With 10-year yields on the rise, financial services exchange traded funds have some positive catalysts with which to work.
Although June is usually a rough month for the sector, financial services stocks and ETFs got a lift last Friday thanks to the jobs report and subsequent rate hike speculation. That includes the $352 million PowerShares KBW Bank Portfolio (NYSEArca: KBWB), which gained 1.8% last Friday. [Bank on Bank ETFs]
“Bank stocks often display a positive correlation to interest rates, and the Taylor Rule suggests that the fed funds rate is more than 200 basis points (2.00%) below its equilibrium rate, using a real fed funds rate of 2.00%, an inflation target of 2.00% and a target unemployment rate of 5.00%.1 This indicates that interest rates should move higher, and an increase in rates is expected to improve bank net interest margins,” according to a recent PowerShares research note.
KBWB often goes overlooked in the world of financial services ETFs, though that should not be the case if for no other reason than that the fund tracks the widely followed KBW Bank Index (BKX). KBWB’s top 10 holdings, a group including Dow component J.P. Morgan Chase (NYSE: JPM), Wells Fargo (NYSE: WFC), Citigroup (NYSE: C) and Bank of America (NYSE: BAC), combine for over 60% of the ETF’s weight.
“Banks are trading at a discount to the broad market based on book value. The BKX is trading at a price-to-tangible-book value of 1.58, compared with 6.33 for the S&P 500 Index. Furthermore, the BKX is trading at a price-to-tangible-book ratio below the January 2002 to April 2015 average of 2.23,” notes PowerShares.
Although KBWB features ample exposure to the largest U.S. money center banks, investors in the ETF would do well to listen closely to what the Federal Reserve is saying about interest rates. The reason being is that about half of the ETF’s 24 holdings are regional banks and that does not include the super-regionals held by the fund, such as Comerica (NYSE: CMA) and SunTrust (NYSE: STI). [Inside a Fast-Growing Bank ETF]
Investors like the KBWB story. When we last visited the ETF on April 30, it was home to just under $236 million in assets under management, meaning the fund has hauled in nearly a third of its AUM tally in less than seven weeks. [Time for Bank ETFs is Now]
PowerShares KBW Bank Portfolio
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.