This week’s tech sector selloff has some investors feeling pessimistic, but there’s always a bull market somewhere, and bank stocks are on fire.
In fact, the SPDR S&P Bank ETF (KBE) is up a scorching 17.99% over just the past month, at a time when the S&P 500 (SPX) is essentially flat. In comparison, the tech-centric Invesco QQQ Trust (QQQ) that invests in the top 100 NASDAQ (NDX) stocks, is down 2.4% (but down 6.3% from recent highs).
Even after this significant run-up, banking sector stocks continue to look attractive. While the valuations of many tech stocks were priced for perfection (which certainly played into the current selloff), the valuations for bank stocks are remarkably inexpensive. KBE’s average price-to-earnings ratio is just 12.3, barely half the valuation of the S&P 500, which trades for 24.2 times earnings. After a challenging environment in 2023, bank stocks are posting strong results in 2024, showing that their businesses are in better shape.
I’m bullish on KBE based on the attractive valuations of its holdings at a time when the market appears to be rotating out of higher-multiple and more speculative growth stocks and into fundamentally sound stocks with more reasonable valuations. I also like KBE’s diversified portfolio which includes a mix of the ‘big four’ banks, superregional banks, and smaller regional players. The fund’s 2.5% dividend yield is an added bonus for investors.
What is the KBE ETF’s Strategy?
KBE is a $2 billion ETF from State Street that “seeks to provide exposure to the bank segment of the S&P TMI (Total Market Index).” This index includes the stocks of asset management and custody banks, diversified banks, regional banks, as well as companies involved in diversified financial services and commercial and residential mortgage financing.
Notably, the fund uses a “modified equal-weighted index” which gives investors “potential for unconcentrated industry exposure across large, mid and small-cap stocks.” This means that you’ll get exposure to the U.S.’s “big four” global systematically important banks (GSIBs) – Bank of America (BAC), JPMorgan & Chase (JPM), Wells Fargo (WFC), and Citigroup (C), as well as super-regional banks like US Bancorp (USB), PNC Financial (PNC) and KeyCorp (KEY), plus smaller regional banks.
This modified equal-weighted approach makes KBE a good way to gain diversified exposure to the breadth and depth of the entire U.S. banking sector, as unlike in market-weighted funds, the big four banks don’t dominate the fund.
KBE’s Portfolio
KBE owns 93 different banking sector stocks, and because of its equal-weighted approach, there is very little concentration risk here, as the fund’s top 10 holdings account for just a negligible 12.7% of the fund.
Below, you’ll find an overview of KBE’s top 10 holdings using TipRanks’ holdings tool.
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As discussed above, KBE invests in the big four banks, but you won’t find them in the fund’s top 10 holdings due to the fund’s modified equal-weighted strategy.
Instead, you’ll find a top 10 that mostly comprises of regional banks, which have recently performed well and thus attained slightly higher weightings. These weightings will continue until the fund’s next quarterly rebalancing.
I like this diversified approach because the big banks are performing well and still feature inexpensive valuations, and the same can be said for these smaller banks.
The big banks that KBE holds, like Bank of America, JPMorgan Chase, Wells Fargo, and Citigroup, all benefited from a rebound in investment banking activity during the second quarter, as each posted double-digit revenue increases in their investment banking segments. The rise in prices of equities in a strong stock market is also helping their asset management and wealth management businesses. All four of these major banks beat earnings and revenue estimates this quarter.
Additionally, banks like Bank of America and US Bancorp have said that rebounds to net interest income are coming. Net interest income is the spread between what banks earn on loans and what they pay depositors for their savings. It is one of the most important metrics for banks and one of the main ways they generate profits.
Despite all this, these stocks still trade at remarkably cheap valuations. Even after a strong post-earnings run, Bank of America still trades at just 12.9 times 2024 earnings estimates, JPMorgan Chase trades for 12.2 times earnings, while Wells Fargo trades for 11.7 times earnings, and Citigroup is the cheapest of the group, trading for 10.8 times earnings. The aforementioned super regional US Bancorp (the fifth-largest bank in the country) trades for 11.6 times 2024 estimates.
The smaller banks that KBE holds also present attractive opportunities. For instance, Western Alliance Bancorp (WAL), a notable regional bank whose stock struggled during 2023’s banking crisis, is up 66.7% over the past year and just posted strong second-quarter results.
The Phoenix-based bank beat top- and bottom-line estimates and raised its full-year guidance based on “robust net interest income growth, gathering loan momentum, and sustained deposit generation.” Even so, the stock is still very cheap, trading at just 10.3 times 2024 consensus earnings estimates and an even cheaper 8.3 times 2025 estimates.
Don’t Forget About the Dividend
While most investors aren’t going to invest in KBE simply for the 2.6% dividend yield, it is a nice added bonus that adds to an investor’s total returns over time. Plus, the yield is nearly twice as high as that of the S&P 500’s average 1.3% yield.
What is KBE’s Expense Ratio
KBE maintains an expense ratio of 0.35%, meaning that an investor in the fund will pay $35 in fees on a $10,000 investment annually. While this isn’t the cheapest expense ratio out there, it is reasonable as it is lower than the average expense ratio for all ETFs, which stands at 0.57%.
Is KBE ETF a Buy, According to Analysts?
Turning to Wall Street, KBE earns a Moderate Buy consensus rating based on 57 Buys, 34 Holds, and three Sell ratings assigned in the past three months. The average KBE stock price target of $52.89 implies 1.7% upside potential from current levels.
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Looking Ahead
There is a lot of doom and gloom in the market right now as stocks in the tech sector, the market’s largest sector, are falling.
But there are plenty of bright spots, including the banking sector, which is humming along nicely. Banking stocks have gained momentum just as tech stocks have sputtered, indicating that some investors may be rotating out of tech stocks with higher valuations into sectors with more appetizing valuations like banking.
Even with a gain of 17.8% over just the past month, KBE still looks attractively valued with an appetizing price-to-earnings ratio of just 12.3. I’m bullish on KBE based on this recent momentum and appealing valuation, which make it an attractive place to allocate investments amid market rotation. The fund’s 2.5% dividend yield and moderate expense ratio also boost its appeal.
Disclosure
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