Playing the Long Game With Bank ETFs Could Work Out for Investors

With interest rates residing at historic lows and no end in sight to that policy, JPMorgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC) and other big bank stocks are languishing.

In other words, it may not appear to be the ideal to consider ETFs such as the Invesco KBW Bank ETF (NASDAQ: KBWB), but investors could ultimately be rewarded for their patience with 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.

There are several factors in the bullish on bank thesis, some of which could take some time to materialize.

“I think what banks need is first and foremost they need higher interest rates. The second thing they need is business activity to pick up because they make money on lending and third, they also need people to make their loan payments,” said Jonathan Golub, Credit Suisse chief U.S.  equities strategist, said in an interview with CNBC. “Right now, it seems generally people are making their loan payments…but those are the three things the banks need and none of those does it seem the investor class should have a good deal of confidence in.”

Banking on Banks

Bargain hunters who are looking for some of the worst-hit areas of the market may consider bank sector-related ETFs to capture the bounce back.

Lenders typically make their money off the difference between long-term loans and deposits, underscoring investors’ apprehension about the industry right now. KBWB would benefit if investors, in earnest, move into cyclical stocks.

Banks are typically more sensitive to consumer and business spending so the stocks were among the heaviest hit during the coronavirus-related economic slump.

“Ken Leon, director equity research at CFRA, said large banks could become attractive once there is more confidence the economy is recovering,” according to CNBC.

Adding to KBWB’s position as a value play, as recently as May, half of the domestic banks were trading below tangible book value – the book value of its common shares, less intangible assets, such as loan servicing rights, goodwill, and deferred tax assets.

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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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