Despite recently increasing calls for a broader market pullback, the financial services sector has held up well. In February, the Financial Services Select Sector SPDR (XLF) lost just 0.11 percent and the ETF is still up nearly eight percent year-to-date.
Home to 84 stocks, XLF is not concentrated solely on money center banks. Rather, the ETF offers exposure to insurance providers such as American International Group (AIG) and real estate investment trusts such as Simon Property Group (SPG) in addition to traditional retail and investment banks.
Investors looking to take advantage of possible ongoing bullishness with major bank stocks might want to consider a more concentrated ETF bet.
"S&P Capital IQ's fundamental outlook for the U.S. Diversified Banks sub-industry for the next 12 months is positive, despite the upcoming economic challenges and regulatory hurdles we see," the research firm said in a new research note. Fourth-quarter results for the three banks which comprise this sub-industry reflected higher-than-expected mortgage banking revenues and significant loan credit quality improvements. In our view, results over the next 12 months for these banks will depend on the resolution of the debt ceiling, growth of the U.S. economy, housing prices and regulatory costs."
Those three banks combine for nearly 18 percent of the Market Vectors Bank and Brokerage ETF's (RKH) weight. By comparison, J.P. Morgan Chase and Citigroup combine for 14.4 percent of XLF's weight while Toronto Dominion is not featured in that ETF.
On a qualitative basis, in addition to Citi, J.P. Morgan and Toronto Dominion, S&P Capital IQ is also bullish on HSBC (HBC), giving the European banking giant a four-star rating as well. HSBC is RKH's largest holding at a weight of almost nine percent.
Using a quantitative screen to assess fair value, S&P notes that six of RKH's top-10 holdings are considered undervalued with Wells Fargo (WFC) not being ranked. In addition to the aforementioned stocks, RKH's other top-10 holdings are Bank of America (BAC), Japan's Mitsubishi UFJ, Goldman Sachs (GS), Royal Bank of Canada (RY) and Spain's Banco Santander (SAN).
"From a risk perspective, RKH earns a favorable ranking input for the Standard & Poor's Credit Ratings of its holdings," said the research firm. JPMorgan, Royal Bank Canada, Toronto-Dominion Bank and Wells Fargo are just some of the holdings that have strong investment-grade ratings of A or higher."
RKH is small compared to XLF and other well-known bank ETFs. The fund is home to just 26 stocks and $22.9 million in assets under management. Volume of just over 35,000 shares per day may turn some investors off, though it should be noted RKH's bid/ask spread on a slow volume day such as Friday is just four cents wide.
The fund spent the bulk of the fourth quarter with closing prices within a half percent or less discount or premium to its net asset value, according to Market Vectors data. Additionally, RKH has outperformed its underlying index by a decent margin in the past year, giving investors the benefit of favorable tracking error in the process.
"Overall, RKH earns an Overweight ranking according to S&P Capital IQ. We think the ETF offers exposure to a number of attractively valued financial services companies, with strong balance sheets, around the globe," the firm said.
RKH has trailed XLF year-to-date, but the former's 30-day SEC yield is about 90 basis points higher than the latter's.
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