On this episode of the “ETF of the Week” podcast, VettaFi’s head of research, Todd Rosenbluth, discussed the Invesco KBW Bank ETF (KBWB) with Chuck Jaffe of Money Life. The pair discussed several topics related to the fund to give investors a deeper understanding of the ETF overall.
Chuck Jaffe: One fund, on point for today. The expert to talk about it. Welcome to the ETF of the Week. Yes, this is the ETF of the Week, where we examine trending, new, newsworthy, unique and intriguing exchange traded funds with Todd Rosenbluth. He’s the head of research at VettaFi. And at VettaFi.com, you’ll find all the tools and the research that you need to become a savvier, smarter investor in ETFs.
Todd Rosenbluth, it’s great to chat with you again.
Todd Rosenbluth: It’s great to be back, Chuck.
Chuck Jaffe: Your ETF of the week is…
Todd Rosenbluth: The Invesco KBW Bank ETF, KBWB.
Chuck Jaffe: KBWB, the Invesco KBW Bank ETF. Why is this one money in the bank right now, Todd?
Todd Rosenbluth: Oh, I knew you were going to do something like that. So, we are now in earnings season. The companies that are expected to lead the charge in fourth quarter earnings season, that’s coming out this week and subsequent weeks, are financial stocks, and in particular banks. We think people are likely underexposed to banks within their broader portfolio.
And we can talk about how much they have and how much perhaps is appropriate to have. But this is the right time to be looking at banks. We are in a higher-for-longer likely interest rate environment. That’s good for financial institutions and good for banks. Banks are likely to be more profitable at the end of the fourth quarter in 2025 than they were in earlier parts, or even a year ago.
And this is a well-diversified, but yet concentrated towards those megacap banks ETF, that we think investors should take a closer look at.
Chuck Jaffe: It is concentrated towards the megacaps. And that’s an interesting space because we’re in a really challenging interest rate environment, right? The expectation last year was that we’d see a bunch of interest rate cuts. We didn’t see them and we didn’t get cuts until the end of the year. And then it was okay, but now the cuts are here. We’ll get a whole bunch of them.
Now, you know, I talked to people who are like, we could have as few as none at this point this year. So it’s an interesting environment. Is there a specific reason why you prefer this fund’s focus on large banks rather than going with the regionals?
Todd Rosenbluth: Right. So, the large banks can benefit from just a rising interest rate environment and what is likely to be strong economic growth globally, because they are the money center banks.
So, we’re alluding to them. JPMorgan Chase, Bank of America, Morgan Stanley, Goldman Sachs, Wells Fargo, those are the five largest holdings, all roughly, I believe, 8% or more in weighting. So that’s the concentration that we’re talking about. The risk is spread around against those larger-cap banks.
This is opposed to regional banking, which of course is going to be impacted more by what region of the economy and happens to be. There are parts of the West Coast that are certainly under pressure. These are national banks and multinational banks that can benefit.
And just to come back to what you were saying earlier, there’s the potential that we not only do we see zero rate cuts in 2025, there are some people — I’m not one of them. I’m not knowledgeable enough to have a view on whether we could have a rate hike. A rate hike, after what was expectations of multiple rate cuts to kick off the year, the environment has certainly shifted in favor of these money center banks.
Chuck Jaffe: The names that you dropped — Wells Fargo, Morgan Stanley, Goldman Sachs, Bank of America, JPMorgan Chase. And by the way, other big holdings include things like Citigroup. Those are names that most investors, if they have a diversified investment portfolio with a large-cap index, they’ve got them. So what’s the role that this is playing in a portfolio?
And I know you don’t make specific portfolio recommendations, but a sector fund like this, what kind of asset allocation? What kind of percentage of a portfolio do you allow it to be?
Todd Rosenbluth: So, let’s use some numbers to back up what I’m about to say. So the financial sector is roughly 13% of the S&P 500, the last time I looked — large, but significantly behind the information technology sector, that is the largest of those sectors.
So, you’re right. If you own an S&P 500 ETF — or other large-cap ETFs, the Russell tied to the Russell 1000 — you’re going to have exposure to all of these stocks.
You’re going to have less exposure on an individual basis to those stocks. One, because it’s only 13% of the portfolio in financials. But then you’re also going to have under-exposure relative to Apple and Microsoft. So you’d have to believe that the banks in the financial sector is going to do relatively well in 2025.
And the banks… Now there are other sector ETFs. There’s the Financials Select Sector SPDR ETF, XLF, that has banks, but also has insurance companies and other related companies. Berkshire Hathaway is the largest of those stocks, I believe in the financial Select Sector SPDR ETF.
You won’t find insurance companies in this ETF. So, if you believe that the financial sector and banks are going to do better, and you want to be more tactical — and I think this is a tactical play, based on the interest rate environment we’re in today, and based on how earnings season comes out, for the financial stocks — then this is a good place to go.
I would note we are recording this before the banks report results, but by the time people are hearing and seeing this, some of those banks will have reported results. So, I want to make sure I get on record. We are favorable. Heading into the news, it is quite possible that the fundamentals are weaker, and thus everything that I’m saying here needs to be taken with a grain of salt.
Chuck Jaffe: That I consider unlikely. And I don’t take much that you would say with a grain of salt. But that brings us to another point. You know, we are always talking about the ETF of the Week, and there’s always a reason why we’re talking about something. But as we just talked about, what’s the role that this fund is supposed to play?
Given that you’re looking at earnings season and strong earnings as your reason to go in, then if the earnings are what you expect them to be, great. Then we’re certainly not taking this with a grain of salt. But, if we get midway through the year or what have you, and the earnings picture changes dramatically at that point, now do we take it with a grain of salt?
But at that point, are we selling it? I mean, you don’t normally come on ETF of the Week and say, “Sell this.” But if somebody’s buying this right now, given what you said and looking at where it’s going, I want to keep the exit in mind. Know where it is.
Todd Rosenbluth: So, yes. The next time that we come together and we talk about a sector or an industry-oriented ETF, we will likely talk about the fundamentals, the favorable fundamentals, the positive attributes of whatever that sector or industry happens to be. And then people should consider that ETF as a replacement for this one. You don’t want to overlay too many sectors within the broader market — within your broader portfolio.
Otherwise, you’re just underexposed to everything else. So most people probably have a core S&P 500 or Russell 1000 U.S. equity exposure. This — the banks in the industry group and financials as a sector group — is an area to focus on perhaps in the first half of the year. And maybe sooner then, we decide to come back with another sector or industry ETF.
But this is not something that should be core to your portfolio. This should be a tactical, because you believe the fundamentals are strong as you see them and are likely to get even stronger.
Chuck Jaffe: I frequently asked you, you know, where does somebody get the money for for this? Where does the money come from? But is there something that in a portfolio allocation right now, as you’re looking at the big banks, there’s something else that you’re kind of going, yeah, you know, if you have a tilt towards this, move away from it now?
Todd Rosenbluth: Well, technology and large-cap growth stocks were so strong in 2024, you are likely more — if you own a technology ETF or you own a large-cap growth ETF. Not just a large-cap core, but a large-cap growth oriented ETF, that likely rose notably in value. You probably are more exposed to that than you perhaps realize, and you could take some of those profits if you think the market’s going to rotate away from the technology and growth-oriented sector to something more value-oriented.
I would note, however, JPMorgan happens to be in the growth index. Now, I wrote about this recently on our ETF Trends website, the iShares S&P 500 Growth ETF (IVW) has JPMorgan in there. So, this is now a growth stock. This isn’t just pure value. But if you have done well with growth in the past year or two, you might want to take some profits on that.
Might — again, not financial advice. And then this ETF, KBWB, could be an alternative.
Chuck Jaffe: It’s the Invesco KBW Bank ETF, the ETF of the Week from Todd Rosenbluth, head of research at VettaFi. Todd, great stuff, but I bank on that with you every week.
Todd Rosenbluth: You can count on it.
Chuck Jaffe: The ETF of the Week is a joint production of VettaFi and Money Life with Chuck Jaffe. And yeah, that’s me. And you can read all about my hour-long weekday podcast by going to MoneyLifeShow.com, or by going wherever you search for great podcasts.
Now, if you’re searching for great exchange traded funds, look no further than VettaFi.com, where they’ve got a full suite of tools that will help you be a better investor and make better decisions. They’re on X at @Vetta_Fi, and Todd Rosenbluth, their head of research, my guest, he’s on X as well, at @ToddRosenbluth.
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