Investors looking for pure play bank exposure instead of diversified financial services exchange traded funds have an array of options to consider. A smart beta idea in this genre is the First Trust Nasdaq Bank ETF (Nasdaq: FTXO).
Capital levels at major U.S. banks are viewed as solid. Additionally, the Trump Administration’s tax reform effort is seen as a potential catalyst for the financial services sector, but it remains to be seen if that effort will come to life.
FTXO may have had the benefit of good timing when it came to market, but there is no denying that the fund has proven popular with investors. The First Trust fund does not turn two years old in September, but it already has over $1.3 billion in assets under management.
What Makes FTXO Tick
This smart beta bank ETF tracks the Nasdaq US Smart Banks Index. That benchmark is a significant departure from old school bank indexes.
“Nasdaq selects the 30 most liquid eligible bank securities from the NASDAQ US Benchmark Index and then ranks those securities based on three factors: volatility – trailing 12-month price fluctuation, value – cash flow to price and growth – the 3-, 6-, 9-, and 12-month average price appreciation,” according to First Trust.
Deregulation could also help the financial sector improve their margins. President Donald Trump has shown its eagerness in cutting back the red tape and remove some of the post-financial crisis regulations that has stifled the industry. FTXO’s 30 holdings have a median market value of nearly $16.1 billion.
Although it is a smart beta fund, FTXO does feature some large weights to banks that hallmarks of cap-weighted funds, such as JPMorgan Chase & Co. (NYSE: JPM) and Citigroup Inc. (NYSE: C). Still, many of FTXO’s holdings are regional or super regional banks, which could position FTXO to benefit as Treasury yields climb.
Higher interest rates would help widen the difference between what banks charge on loans and pay on deposits, which would boost earnings for the financial sector. Regional banks are among the stocks most positively correlated to rising interest rates because higher rates improve net interest margins.
FTXO is up about 3% this year and resides about 7% below its 52-week high.
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