Should You Buy Bank ETFs Now? Let's Find Out

The U.S. banking sector seems to be having a tough time. The Dow Jones U.S. Banks Index has already lost 22% since the beginning of this year, in comparison to Dow Jones Industrial Average’s decline of 8.8%. The current situation doesn’t seem to be too conducive for the banking sector. The U.S. Federal Reserve slashed interest rates on Mar 3 in order to combat the aggravating coronavirus crisis. The rates were cut by a half percentage point to a target range of 1.00% to 1.25%. Highlighting the severity of the situation, the rate cut happened for the first time outside of a scheduled policy meeting since 2008. Moreover, market participants are rooting for another rate cut by June (read: ETFs to Play as Fed Surprises With a Rate Cut).

It is a well-known fact that banks thrive in a rising rate environment. Hence, a cut in interest rates is detrimental to banks. As interest rates fall, banks will earn less on lending. This in turn compresses net interest margin. Moreover, it is believed that if the paying out deposit rates are more than the market rates, the bank margins suffer. Accordingly, declines of around 3.7% and 5.5% were observed in the shares of JPMorgan Chase & Co. (NYSE:JPM) and Bank of America Corp. (NYSE:BAC) on the day of the latest Fed rate cut. Moreover, more than a 3% drop was seen in shares of Citigroup Inc. (NYSE:C) and Morgan Stanley (NYSE:MS) .

Going on, for the first time, the benchmark 10-year U.S. Treasury note yield has dropped below 1% on Mar 3. The declining yields were a result of investors’ flight for safety to bonds, as concerns over slowing global economic growth due to the coronavirus outbreak started escalating. Notably, the declining trend in yields does not bode well with the banking sector (read: High Yield Dividend ETFs & Stocks to Buy as Fed Cuts Rate).

Notably, the outbreak is showing no signs of slowing down yet. The virus has now spread to around 93 countries and territories around the world, claiming 3,406 lives along with 100,162 confirmed cases.

These factors do not paint a rosy picture for the banking sector. Let’s take a look at some bank ETFs for our investors:

SPDR S&P Regional Banking (NYSE:KRE) ETF (CSE:KRE) — down 21.4% year to date

This fund, having an AUM of $1.37 billion. It follows the S&P Regional Banks Select Industry Index, charging investors 35 basis points a year in fees. Holding a basket of 122 securities, the fund is widely spread out with each security holding less than 3.2% of the assets (read: What Coronavirus Induced 'Emergency' Rate Cut Means for Banks)

SPDR S&P Bank (NYSE:KBE) ETF KBE – down 20.1%

This fund offers equal weight exposure to 90 banking stocks by tracking the S&P Banks Select Industry Index. Regional banks dominate the portfolio with 74.2% share while thrifts & mortgage finance, diversified banks, other diversified financial services, and asset management & custody banks take the remainder. It has amassed $1.35 billion in its asset base. The product charges 35 bps in annual fees (read: Bank ETFs to Ride High on the Holiday Shopping Spree).

Invesco KBW Bank ETF KBWB — down 22.6%

This fund provides exposure to 24 companies, primarily engaged in U.S. banking activities by tracking the KBW Nasdaq Bank Index. It is concentrated on the top five firms that make up for more than a 7.2% share each. The fund has managed $447.6 million in its asset base. Expense ratio comes in at 0.35% (read: Banking Earnings Mixed, ETFs Gain Moderately).

First Trust Nasdaq Bank ETF FTXO — down 22.4%

This fund follows the Nasdaq US Smart Banks Index, measuring the performance of U.S. companies within the banking industry. It holds 31 securities in its basket with none representing more than an 8.53% share. The ETF has AUM of $104.7 million. It charges 60 bps in annual fees.

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