Financials: Much More 'Black', Much Less 'Rock' - Part II

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Includes: AMG, BAC, BBT, BBVA, BCS, BEN, BK, BNPQF, BNPQY, C, CFG, CIT, CMA, COF, CRARF, CRARY, CS, DB, EUFN, EV, FII, FITB, FRC, GS, HBAN, HSBC, HYG, ING, IVZ, JPM, KBE, KRE, LYG, MS, MTB, OFF, OPB, OZK, OZM, PBCT, PNC, PRU, RBS, SAN, SBNY, SCGLF, SCGLY, SCHW, SIVB, STI, STT, TCBI, UBS, UNCFF, UNCRY, USB, WFC, XLF, ZION
by: The Fortune Teller
Summary

In part one, we looked at the leading financial ETFs.

In this part, we are looking at the leading components of these ETFs.

There are common and there are unique issues for each segment within the sector.

All for one and one for all? Not here, not now.

In the first part of this quick, two-part, series we looked at the leading ETFs of the financial sector (XLF), American banks (KBE), European banks (EUFN), and US regional/smaller banks (KRE).

Chart XLF Total Return Price data by YCharts

In this part, we will touch upon some of these ETF holdings and compare the performances of the top holdings of each ETF to the performance of the ETF itself.

US Banks Returns in 2018:

Benchmark: SPDR® S&P Bank ETF -10.1%

Except for JPMorgan Chase & Co (JPM), with its +0.7% positive total return YTD, they are now all in the red:

  • US Bancorp (USB) -2.3%
  • BB&T Corp. (BBT) -3.2%***
  • Bank of America Corporation (BAC) -7.2%
  • Citigroup Inc. (C) -10.4%
  • Bank of New York Mellon Corp. (BK)* -12.9%
  • Wells Fargo & Co. (WFC) -13.3%
  • Capital One Financial Corp. (COF) -13.3%
  • Goldman Sachs Group Inc. (GS) -13.3%
  • Morgan Stanley (MS) -13.9%
  • PNC Financial Services Group Inc. (PNC) -14.6%
  • HSBC Holdings PLC (HSBC)** -19.5%
  • State Street Corporation (STT)* -27.5%

* BK and STT are considered to be both banks and asset managers.

** Not a US bank per se

*** Technically, a regional bank; the largest holding of the SPDR S&P Regional Banking ETF

Average total return YTD (excluding HSBC): -10.9%

Chart JPM Total Return Price data by YCharts

US - relevant articles:

The most important thing for US banks is the Fed (specifically) and central banks (worldwide) is monetary policies. Banks would love to see widening spreads, i.e. yields start rising higher and faster than rates.

Asset Managers Returns in 2018

Benchmark: Financial Select Sector SPDR® ETF -5.9%

Ouch! All are in double-digit negative total returns:

  • Charles Schwab Corp. (SCHW) -12.2%
  • Bank of New York Mellon Corp (BK)* -12.7%
  • Eaton Vance Corp. (EV) -21.1%
  • Franklin Resources Inc. (BEN) -26.0%
  • State Street Corporation (STT)* -27.4%
  • Federated Investors Inc. (FII) -34.7%
  • Invesco Ltd. (IVZ) -40.2%
  • Affiliated Managers Group Inc. (AMG) -42.3%
  • Och-Ziff Capital Management Group LLC (OZM) -44.2%

Average total return YTD: -29.1%

Chart SCHW Total Return Price data by YCharts

Asset managers are currently suffering from three main issues:

1. AUM Outflows

The volatility of flows in and out of iShares iBoxx $ High Yield Corp Bd ETF (HYG), BlackRock's $14.4B US high-yield bond ETF, has been tremendous and accelerating. This suggests that there is a lot of institutional involvement here and a great deal of disagreement as to market direction.

2. Shift of focus (Abandoning the traditional profit drivers)

A big takeaway from BlackRock's earnings is the increasing focus on their technology unit, where revenue increased 18%. CEO Larry Fink said he hopes this unit will produce 30% of the firm's revenue by 2022.

It speaks volumes that the biggest ETF issuer in the world (and the only company who is even close to Vanguard, flow-wise) is aggressively diversifying away from fund management businesses.

I'm wondering whether BlackRock is looking ahead to a new model of fund management in a zero-fee era where tech support/applications/trading platforms are the revenue drivers and fund management is the enticement/public?...

3. Fierce competition that drives fees (too?) much lower.

Last week, Prudential (PRU) has quietly launched the cheapest active equity ETF, priced at only 0.17%* per annum. Unless I'm mistaken, this is the cheapest active equity and fixed income ETF in the market.

*Indeed, Vanguard's factor and iShares evolved ETFs are cheaper, but they are traditional-active, not pure active

European Banks Returns in 2018

Benchmark: iShares MSCI Europe Financials ETF -17.2%

They are all showing negative total returns of about 20% or worse:

**Not a European bank per se

Average total return YTD (excluding HSBC): -25.4%

Chart RBS Total Return Price data by YCharts

Europe - relevant articles:

Spanish banks - relevant articles:

German banks - relevant articles:

For European banks, there is one thing - and one thing only: The "big brother" support. The harbinger of a new era doesn't look good/promising.

ECB's balance sheet has shrunk by €4.6B to €4,628.3B as the amount of bonds reaching final redemption have exceeded the reduced amount of new purchases. This means that liquidity is being drawn out of the markets.

Having said that, ECB's total assets still equate to 41.3% of the entire eurozone GDP, (more than) twice as high as the Fed's 20.5%.

Regional/Small Banks Returns in 2018

Benchmark: SPDR® S&P Regional Banking ETF -8.6%

Not that bad as you would expect, especially when you read about names like Bank OZK (OZK), Opus Bank (OPB), or Texas Capital Bancshares (TCBI)

  • SVB Financial Group (SIVB) +17.0%
  • First Republic Bank (FRC) +2.3%
  • Huntington Bancshares Inc. (HBAN) -2.7%
  • SunTrust Banks Inc. (STI) -4.5%
  • Comerica Inc. (CMA) -5.4%
  • CIT Group Inc. (CIT) -5.7%
  • M&T Bank Corp. (MTB) -5.8%
  • Zions Bancorp NA (ZION) -5.9%
  • Citizens Financial Group Inc. (CFG) -12.2%
  • Fifth Third Bancorp (FITB) -12.8%
  • People's United Financial Inc. (PBCT) -14.5%
  • Signature Bank (SBNY) -20.9%

Average total return YTD: -5.9%

Chart SIVB Total Return Price data by YCharts

This is good perspective to understand the dramatic underperformance of smaller banks this year. They've been unable to regain their prominence as lenders over the past few years as big banks get bigger and alternative investors get more into direct lending.

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Disclosure: I am/we are long JPM, C, BAC, MS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.