Bad News May be Baked in, So Bank on Bank ETFs | ETF Trends

JPMorgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC) got financial services earnings season started on Tuesday and the news wasn’t pretty, but that was to be expected and some market observers believe with dour profit expectations for big banks already price into the stocks, considering these names and ETFs such as the Invesco KBW Bank ETF (NASDAQ: KBWB) over the near-term could be a winning play. KBWB tracks the widely followed KBW Nasdaq Bank Index.

“The Index is a modified-market capitalization-weighted index of companies primarily engaged in US banking activities. The Index is compiled, maintained and calculated by Keefe, Bruyette & Woods, Inc. and Nasdaq, Inc. and is composed of large national US money centers, regional banks and thrift institutions that are publicly traded in the US,” according to Invesco.

With a slew of big banks beyond JPM and Wells Fargo reporting this week, KBWB could be in focus as investors mull how much these companies are setting aside for bad loans (probably more than expected) and how defensible dividends are. Even with potential headwinds looming, KBWB looks compelling on valuation.

“Due to the coronavirus crises, the Fed has taken interest rates to near zero, providing another layer of punishment for already depressed net interest margins,” according to Nasdaq. “With that factor in mind, it’s not surprising that bank stocks are one of the most credible value plays in the U.S. For its part, KBWB sports a price-to-earnings ratio (P/E ratio) of 7.40x and its forward P/E of 7.77x is by no means lofty.”

Rate Risk Priced in Too?

With the Federal Reserve having pared interest rates to near zero, concerns are mounting about banks’ net interest margins and whether those depressed margins could affect shareholder rewards, including buybacks and dividends.

Lenders typically make their money off the difference between long-term loans and deposits, underscoring investors’ apprehension about the industry right now.

“Buttressing the case for KBWB and friends today is a twofold scenario. First, banks are well-capitalized today, which is to say 2020 isn’t a 2008 type of situation in waiting. Second, this year’s markets meltdown is being caused by the COVID-19 pandemic whereas the global financial crisis was prompted by, well, banks,” according to Nasdaq.

As for dividends, if bank payouts prove sustainable, that could be promising for KBWB investors with the fund sporting a 12-month distribution rate of 3.86%.

For more on multi-asset strategies, please visit our Multi-Asset Channel.

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.