Bank exchange-traded funds (ETFs) offer investors exposure to the banking and financial sector of the economy. Banking services include taking deposits, making loans, and facilitating payments. Other financial services include investment management, retirement planning, insurance, and brokerage services. Aside from charging fees for these services, banks earn profits by charging higher interests rates on the loans they make than the rates they pay on their customers' deposits. Bank ETFs are a way for investors to share in these profits by investing in a basket of banks and other financial services companies.
- The banking sector dramatically underperformed the broader market over the past year.
- The ETFs with the best 1-year trailing total return are KBWB, IAT, and KBE.
- The top holdings of these ETFs are Citigroup, Truist Financial, and SVB Financial Group, respectively.
The bank ETF universe is comprised of about 6 distinct ETFs, excluding inverse and leveraged ETFs as well as funds with less than $50 million in assets under management (AUM). The banking sector, as measured by the S&P 500 Banks Industry Index, has dramatically underperformed the broader market with a total return of -14.2% over the past 12 months compared to the S&P 500's total return of 24.8%, as of September 2, 2020. The best-performing bank ETF for Q4 2020, based on performance over the past year, is the Invesco KBW Bank ETF (KBWB). We examine the top 3 bank ETFs below. All numbers below are as of September 3, 2020.
- Performance over 1-Year: -11.7%
- Expense Ratio: 0.35%
- Annual Dividend Yield: 3.82%
- 3-Month Average Daily Volume: 1,005,033
- Assets Under Management: $856.8 million
- Inception Date: November 1, 2011
- Issuer: Invesco
KBWB tracks the KBW Bank Index, a float-adjusted modified-market capitalization-weighted index that measures the performance of banks or thrifts. The ETF is composed of 25 bank stocks with various market caps, and the top five holdings comprise about one third of the fund's total assets. For this reason, it is not the most diversified ETF. Also, a fair number of the fund's holdings are small-cap, regional-based firms. Traditional banking services tend to drive the profits of these smaller banks. The fund's strategy is focused primarily on value stocks, as opposed to growth stocks. Its top three holdings include Citigroup Inc. (C), Bank of America Corp. (BAC), and U.S. Bancorp (USB), all three of which are holding companies that offer a range of banking and financial services.
- Performance over 1-Year: -15.6%
- Expense Ratio: 0.42%
- Annual Dividend Yield: 3.77%
- 3-Month Average Daily Volume: 235,885
- Assets Under Management: $234.6 million
- Inception Date: May 5, 2006
- Issuer: iShares
IAT tracks the Dow Jones U.S. Select Regional Banks Index, which gauges the performance of the regional bank sub-sector of the U.S. equity market. The ETF is composed of more than 60 equities with a particular focus on small- and mid-cap bank stocks. Despite having more holdings than KBWB, the fund's top two holdings account for almost a third of its total assets. That means that just a couple of stocks have a significant impact on the fund's total returns. IAT follows a strategy focused on value stocks. Its top three holdings include Truist Financial Corp. (TFC), U.S. Bancorp, and PNC Financial Services Group Inc. (PNC), all three of which are holding companies that offer a range of banking and financial services.
- Performance over 1-Year: -17.4%
- Expense Ratio: 0.35%
- Annual Dividend Yield: 3.26%
- 3-Month Average Daily Volume: 3,210,792
- Assets Under Management: $1.3 billion
- Inception Date: November 15, 2005
- Issuer: State Street SPDR
KBE tracks the S&P Banks Select Industry Index, an index composed of bank stocks. Like KBWB, this ETF is concentrated in about 25 individual stocks with various market capitalizations. Given its focus on a narrow sub-sector of the financial sector, it is unlikely to have appeal as part of a long-term, buy-and-hold strategy. But some investors may find it useful as part of a tactical tilt to profit from a rebound following a big sell-off in financial stocks. Similar to both of the other two ETFs above, KBE is focused on value stocks in the U.S. banking and financial sector. Its top three holdings include SVB Financial Group (SIVB), a holding company that offers a range of banking and financial services; MGIC Investment Corp. (MTG), a provider of private mortgage insurance; and Voya Financial Inc. (VOYA), a financial, retirement, investment, and insurance company.