Multiple bank collapses stoked fears that more could be on the way, creating damaging headwinds for bank stocks and the related exchange traded funds.
While bank collapses are unnerving and the financial services sector ranks as one of the worst-performing groups in the S&P 500 this year, there is some silver lining for investors. First, there’s a renewed emphasis on quality in the group. Second, calamity in the space is providing investors with an opportunity to consider more diverse large-cap strategies that aren’t solely dedicated to bank stocks.
Enter the Invesco S&P 500 Equal Weight Financials ETF (RYF). No, RYF hasn’t been immune to this year’s volatility in the sector. A 10% decline proves as much, but that arguably belies opportunity with the equal-weight ETF. With the first-quarter bank earnings season kicking off in earnest on April 14, RYF has an opportunity to rebound.
“The large commercial banks kick off earnings season on Friday, April 14, with JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) set to report first-quarter results. Bank of America (BAC) is scheduled to report April 18. Smaller regional banks, including Citizens Financial Group (CFG) and U.S. Bancorp (USB), are due to begin reporting next week. Troubled First Republic Bank (FRC) reports April 24,” notes Morningstar’s Sandy Ward.
The trio of RYF components mentioned above stepping into the earnings confessional on April 14 combine for just over 4% of the ETF’s roster. Problem bank First Republic is RYF’s smallest holding at a weight of just 0.24%.
Beyond updates on overall health, the issues market participants are likely to be focusing on this bank earnings season are credit loss trends, dividend outlooks, loan growth, and net interest margins, among others.
“Banks, particularly midsize and regional banks, remain under intense pressure amid concerns about unrealized losses on bond investments, exposure to commercial real estate, and uneasiness about deposit flight,” added Ward. “So far, most of the problems have emerged at midsize regional banks, which account for nearly half of all commercial and industrial loans, 70% of real estate loans, and nearly 40% of residential mortgages, according to Morgan Stanley.”
While RYF features some exposure to mid-sized regional banks, the ETF’s overall bank allocation is just 18.74%. Conversely, the fund devotes nearly 63% of its weight to insurance providers and capital markets firms, the firm of which is positively correlated to rising interest rates.
Additionally, those RYF member firms along with the likes of American Express (AXP), Mastercard (MA), and Visa (V) may be able to support dividend and buyback growth this year even if smaller banks face more trouble ahead.
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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.