Bank ETFs: Dire Predictions Slam Lenders, Bankers, and Brokers

The S & L crisis claimed thousands of thrift banks in the late 80s and early 90s. In the recession-fueled 90-91 period alone, 500 banks went down with the ship.

Here in 2008, in spite of "depressionesque" predictions, we have seen only 3 banks go under. Yet those "in the know" believe that there are many more failures to come.

Gerard Cassidy at RBC Capital Markets recently estimated that, over the next few years, 150 small- and medium-sized financial firms may get beaten or eaten. And that's if recessionary forces remain mild. If they become more severe, he believes the number could swell to 300.

Little wonder, then, that the streetTracks KBW Regional Banking Fund (KRE) is off 2.7% through three quarters of the trading day yesterday. Bigger banks are faring even worse... off 3% in the streetTracks KBW Bank Index Fund (KBE).

Indeed, the credit crunch is hampering the economy. It's killing real estate prices. And it's likely to crush a number of banks due to an inability to access capital to replace revenue from lost loan dollars.

Put a fork in 'em, then? Not so fast.

Let's assume the worst forecast from RBC; that is, should the economy take another leg down, 300 banks falter over the next several years. That'd be a fraction of the thousands of thrifts that failed over the late 80s/early 90s. Similarly, it would only be a "three-fifths" of what occurred in the recessionary period of 1990-1991.

I point this out, not to say that 300 banks failing would be a good thing; rather, I'd like to look at what happened to financial stocks at that time:

1. Dividend yields rocketed from 1990-1991. Financial company dividends are larger than utility company dividends here in 2008. The last time that happened was back in 1990-1991.
2. The Fed drastically cut the Fed Funds rates from 7% to 4% in 1990-1991. Our Fed funds rate has been slashed from 5.25% to 2%, increasing the margins of profitability for banking. (Read more about bank profitability on the "Financial Frontier.")
3. Financial stocks collectively rose 44% in 1991, even with the S&L crisis. History may not repeat itself exactly, but it does repeat itself; that is, financial companies have the Fed to bail them out. They've been crushed to smithereens, and while a bottom may be impossible to call, there's a great deal of upside potential with the Fed on your side and an eventual "uncrunching" for the lenders/bankers still standing.

It may be difficult to swallow the volatility of the KBW Bank Index Fund, even with a 5%+ yield. Perhaps a pan-financial approach with the S&P Select Financial Spider (XLF) might be easier on the stomach. (It has an attractive yield of 3.75%.)

Personally, I'd rather get my financials through the Dow Jones Select Dividend Fund (DVY). With 40% exposure, you're getting plenty. And the 4.3% yield makes sense over treasury bond alternatives.

Nevertheless, DVY hasn't gained as much traction as one would like to see. It still trails the S&P 500 (SPY). On the other hand, it is outlasting the Broker-Dealers (IAI) and the SPDR Select Financials.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[karchad]

My gosh, somebody actually wrote a GOOD article on financials for Seeking Alpha! Hey, guy, with such good analysis, you're liable to ruin all the negativity that I need to make money off the doomsdayers! Cut it out!