An Unheralded Regional Banking Play

By Traders Huddle | June 15, 2012 AAA

More than three years removed from the darkest days of the global financial crisis, investors still have a hard time trusting major U.S. and European bank stocks and with good reason. A prime example is JPMorgan Chase (NYSE: JPM), the largest U.S. bank by assets. Long believed to be the most financially sound major U.S. bank, the Dow component has fallen on hard times recently because of a major loss of at least $2 billion tied to complex credit securities trading gone awry.

The JPMorgan situation is just one of many that underscores the notion that there is still a large amount of risk that comes along with investing in the major U.S. banks. Investors looking for a less headline risk with their financial services exposure might want to consider the anonymous First Trust NASDAQ ABA Community Bank Index Fund (NASDAQ: QABA).

QABA isn't most heavily traded bank ETF out there. On June 14, just 300 shares in the ETF changed hands and the fund's average daily volume is barely over 6,200 shares. Nor is QABA particularly large. Just a few days shy of its third birthday, QABA doesn't even have $11 million in assets under management.

However, those statistics belie the most thing about QABA: Its holdings. Home to 105 stocks, QABA is a play on the more boring side of the banking world. Major money center and investment banks? Forget about that. Most of this ETF's would struggle to fit into the regional bank category. Chances are some of QABA's holdings may be familiar to most investors, depending on where they live, but there is also an excellent chance that most investors have not heard of all of this ETF's constituency and that's a good thing.

Widely known and heavily traded doesn't always mean superior returns when it comes to bank stocks. Just ask Bank of America (NYSE: BAC) and Citigroup (NYSE: C). The banks found QABA's holdings generally engage in taking deposits and making commercial and residential real estate and business loans. A fair amount have credit card operations, but none have sophisticated trading operations or investment banking businesses. Again, that's OK because it's those businesses that led the major banks to heartache during the financial crisis.

The biggest risk to the bull case for QABA is bank failures. The government has all but said major banks such as those mentioned in this article are "too big to fail," but Uncle Sam has not been shy about letting small community banks go under.

While the number of bank failures has declined in the past three years, it should be noted that even though many of QABA's holdings are financially sound, an unexpected increase in bank failures would pressure this ETF.

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