Proof That Hope Burns Eternal for Bank ETFs | ETF Trends

Bank stocks and the related ETFs are dealing with multiple confounding scenarios this year, but it could finally be time to back the Invesco KBW Bank ETF (NASDAQ: KBWB). 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.

Rock-bottom interest rates and rising loan loss reserves are among the factor hampering KBWB and other bank ETFs, but the latter scenario could turn for the better if the U.S. economy bounces back.

The problem with banks setting aside large chunks of cash to cover bad loans is that the strategy weighs on earnings. Those reserves come directly out of profits, but if the economy improves, KBWB holdings may not need to cover as many bad loans as expected, meaning those reserves could eventually be turned into profits.

Good News on the Way?

“Since July, there has been a relative dearth of data from the banks, even as some economic statistics—namely, employment figures for August—have surprised to the upside. Barron’s recently noted that some banks may find that they’re in a position to release reserves as early as next year if the economy continues to recover. That could boost their earnings,” reports Carleton English for Barron’s.

Some analysts believe bank stock performance is about to take a turn for the better after falling behind amid pandemic-induced revenue concerns due to low interest rates and weak loan growth, along with credit concerns. Plus, there are some near-term catalysts for KBWB and friends.

“Some of that negative sentiment may turn next week when 34 U.S. banks present at Barclay’s 18th annual Global Financial Services Conference. Investors will want to pay close attention to the executives’ comments on credit quality—borrowers’ ability to pay what they owe—to see if sentiment has shifted as the economy recovers,” according to Barron’s.

KBWB yields 4.10%.

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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.

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