The time for the financial sector exchange traded funds may be at hand. After a year of recuperating from the financial crisis, big banks may be healthy enough to resume the task of making big money.
Big banks and the financial sector ETFs may be the best performers in the few weeks to come, opines Jeffrey A. Miller for iStockAnalyst. Miller analyzed the sector by looking at Trends, Cycles and a bit of Anticipation, or what he calls the TCA-ETF system.
The recent dip in major bank stocks came after President Barack Obama announced increased bank regulations. Critics see this as an attack on the fundamental business model and Congressmen are in no real rush to push the changes. [How New Bank Tax Could Hurt the Industry.]
The most prominent bullish argument for banks is the yield curve slope, which allows banks to make profits on the rate spread. [Fed Hikes Rates.]
Lastly, don’t forget that the most beaten-down areas tend to do best in recoveries, since they have the most ground to make up.
Miller suggests playing the SPDR KBW Bank (KBE) to gain exposure in major banks. KBE includes 26 names and has all the big bank names you’d expect, such as Bank of America (BAC) is 9.06%, Wells Fargo (WFC) is 7.92% and Citigroup (C) is 7.93%. The ETF has a price-to-earnings ratio of 16 and an earnings growth rate of 8%. Dividends are 1%.
Regional banks can be an appealing option, too. They’re smaller, so they’re less likely to come under the scope of Obama’s new proposals. Regional banks also were relatively unscathed during the financial fallout of 2008, and have so far reported fourth-quarter earnings that exceed expectations.
- SPDR KBW Regional Banking (KRE)
- iShares Dow Jones U.S. Regional Banks (IAT)
If you’re looking for opportunities in the financial sector, a simple strategy we recommend is trend following: when a position is above its 200-day, it’s a buy signal; when it’s below or 8% off the recent high, it’s a sell.
Max Chen contributed to this article.