Avoid Turmoil With The Community Bank ETF - Leveraged ETFs
November 29 2011 - 3:11AM
Zacks
Much like in the past, financials have been a sector to avoid
this year as a number of issues plagued the space. Concerns over
European exposure have dominated the industry for the past few
months causing many of the biggest banks in the nation to slump
once again heading into the winter. Rumors of stress tests to large
institutions haven’t helped dismay these fears, and have caused
many to wonder if financials are setting themselves up for another
bailout situation in the near future. Unfortunately for the sector,
government support, thanks to staunch Congressional disapproval and
widespread protests, looks to be limited—if not non-existent—this
time around, making an investment in big financials a tough pill to
swallow (read German Bond ETFs In Focus).
Yet for those seeking to maintain a well-diversified portfolio,
complete avoidance of the financial sector seems unwise, especially
if the market comes back to normal in months ahead. Furthermore,
many corners of the financial market are not nearly as impacted by
these European concerns as their big bank counterparts. This
suggests that while they may have been beaten down by the weak
economy, they could be due for a surge in months ahead as more
investors realize how cheap some of these securities have become.
For those subscribing to this idea, a closer look at First Trust’s
NASDAQ ABA Community Bank ETF (QABA) could be warranted.
QABA In Focus
QABA seeks to track, before fees and expenses, the NASDAQ OMX
ABA Community Bank Index which is a financials-based equity
benchmark that takes a novel approach to investing in the sector.
The fund includes the common stock of all NASDAQ listed banks and
thrifts, or their holdings companies, that are designed as banks by
the ICB. However, the benchmark excludes any of the 50 largest
organizations in this group based on asset size, as well as any
firms that have an ‘international specialization’ or a ‘credit-card
specialization’ as determined by the most recently available call
report data as compiled by the FDIC. This approach ensures that
many of the big banks that dominate other, more popular ETFs in the
space are excluded from the fund and that the product has a very
different risk/reward profile than many of its peers (read The
Yield King Of Leveraged ETFs).
As a result, holdings in this ETF are not firms such as Bank of
America or Citigroup, but rather People’s United Financial (PBCT)
and BOK Financial Corporation (BOKF), along with about 100 other
small-cap oriented banking institutions. In fact, the median market
cap of the fund is just $543 million while the maximum market cap
for any one security is just under $5 billion, suggesting that the
product has a heavy tilt towards pint-sized securities. Investors
should also note that thanks to concerns over the broad industry,
valuation statistics on the product have fallen to rock-bottom
levels. The P/E is below 5.6 while the Price-to-Book ratio is
approaching 1.0, suggesting that the fund is trading at very
favorable levels for those that are in it for the long term.
Thanks in part to this deep value, as well as the heavy concerns
impacting big banks but not their more community-focused cousins,
QABA has also outperformed more popular and larger cap focused
securities on the year. In year-to-date terms, QABA has lost 17.6%
while XLF has fallen by 26.1% in the same period. Furthermore, over
the past three months as concerns over European exposure have
really come to a head, XLF has fallen by about 7.8% while QABA has
gained 0.5% in the same time frame.
This should show investors that while the standing of the
financial sector isn’t exactly great right now, it is far from
uniform across the space. While big banks like BAC and C may be
struggling, and in some cases, fighting for their lives, the same
isn’t true in the community bank space. Many of these securities
are doing quite well and, in fact, are still trading at deep
values. This suggests that for investors seeking to gain exposure
to the financial corner of the market this small-cap focused QABA
could be the way to go, both as a way to avoid some of the sector
turmoil and as method to keep portfolios well diversified across
sector lines.
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BANK OF AMER CP (BAC): Free Stock Analysis Report
BOK FINL CORP (BOKF): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
PEOPLES UTD FIN (PBCT): Free Stock Analysis Report
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