A low-cost way to bet on U.S. banking

Banks have outperformed broader U.S. stock markets in 2015, as investors are bullish on higher interest rates and credit quality has stayed strong.

Robert Goldsborough 15 December, 2015 | 6:00PM

Most Canadians likely have ample exposure to the domestic financial services sector, which is dominated by the big banks, through broad-based Canadian equity funds. But for those who like the prospects of the banking sector but would like to add geographic diversification to their portfolios,  SPDR S&P Bank ETF (KBE) provides an interesting option. This narrowly focused exchange-traded fund tracks the S&P Banks Select Industry Index, which contains 61 banks based in the United States.

S&P applies equal weighting to the index's holdings, though it makes adjustments where necessary to ensure adequate liquidity. That means the portfolio is neither concentrated nor dominated by large banks such as  Bank of America (BAC) and  JPMorgan Chase (JPM).This equal-weighting approach can create higher turnover than a comparable fund tracking a market-cap-weighted index. In fact, the fund's turnover was 29% for the year ended December 2014. S&P rebalances the index quarterly.

The equally weighted portfolio also gives KBE a mid-cap tilt; small- and mid-cap companies represent 85% of the portfolio. Consequently, its holdings' average market cap is only US$6.7 billion. Unlike broad financials-sector funds, KBE excludes non-bank financial institutions such as REITs and insurance companies. As a result, it tends to be slightly more volatile than its more diversified sector peers.

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

To view this article, become a Morningstar Basic member.

Register For Free

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Banco Santander SA ADR2.38 USD6.73
Bank of America Corporation25.98 USD7.00
Citigroup Inc52.26 USD8.49
Deutsche Bank AG8.68 USD5.72
JPMorgan Chase & Co101.37 USD5.79

About Author

Robert Goldsborough

Robert Goldsborough  Robert Goldsborough is an analyst covering equity strategies on Morningstar’s manager research team.