Bank stocks and exchange traded funds have been under pressure this year, but tactical opportunities are available in the group. The First Trust NASDAQ ABA Community Bank Index Fund (NasdaqGM: QABA) might just be one of those opportunities.
The $171.8 million QABA, which tracks the NASDAQ OMX ABA Community Bank Index, is up about 1.2% year-to-date. Banks and the financial sector have been lagging the broader market due to a combination of low interest rates, regulatory pressure, potential energy sector write-downs and increased litigation fees and fines.
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However, many smaller banks are not as vulnerable to the increased fee and regulatory some mega banks face. QABA’s three-year standard deviation and beta are slightly below that of the S&P Composite 1500 Financials Index and banks “must meet certain operating history, solvency, and financial statement requirements to remain eligible for inclusion in the index,” according to First Trust. Constituent companies must have market values of at least $200 million and average daily volume of at least $500,000.
Still, smaller community banks, including some that reside in QABA, would benefit from higher interest rates. Unfortunately, the Federal Reserve appears unlikely to oblige on that front.
[related_stories]Financial entities like banks will benefit from expanding margins as rates climb. A rising rate environment may reflect a strengthening U.S. economy, and a healthier economy would help borrowers have an easier time repaying loans, with banks stuck with fewer non-performing assets. Moreover, rising rates means that banks will generate greater revenue from the spread between what they pay deposit savers and the prime rates they charge credit-worthy clients and other highly-rated debt.
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“Another positive factor for small-cap bank stocks is some lessening by the federal government of the extremely restrictive regulations under the Dodd-Frank Act and other financial laws passed in the aftermath of the 2008 financial crisis,” reports Investopedia.
An improving U.S. economy could foster increased borrowing and financing by businesses, large and small, across the U.S. while benign mortgage rates could also provide a lift to the mortgage lending operations of community and regional banks.
“Owners of regional banks have made some headway in convincing legislators that their businesses are being unfairly hurt by extensive regulations that are more properly aimed at major financial firms, not local community banks. In 2015, the Federal Reserve relaxed some lending and acquisition regulations for regional banks. Small-cap banking firms are poised to eventually obtain a substantial advantage over major commercial banks in terms of being relatively less hampered by federal regulations and the costs of compliance,” adds Investopedia.
First Trust NASDAQ ABA Community Bank Index Fund
