With results from another batch of Federal Reserve stress tests on U.S. banks expected to start trickling in later today, the sector is showing signs of life, but investors need to remember something. These are not the Comprehensive Capital Analysis and Review, or the stress tests that really have the potential to move banking shares.
The primary difference between the Dodd-Frank stress tests, the results of which are coming out today, and the Comprehensive Capital Analysis and Review is that the latter is what the Fed uses to approve or disapprove a bank's capital plans. Said another way, the Comprehensive Capital Analysis and Review is what the Fed uses to sign off on or reject a bank's dividend and/or share repurchase plans.
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However, waiting another week for the results of the Comprehensive Capital Analysis and Review does not diminish the importance of the headlines banks will generate over the next 24 hours. With a plethora of ETFs devoted to the financial services sector, nimble traders will want to consider some of the following funds.
Financial Select Sector SPDR (NYSE:XLF) As the largest financial services ETF (over $10.8 billion in assets under management) and most heavily traded (average daily volume of almost 49 million shares), XLF makes for a predictable member of this list. Predictable or not, XLF is where traders have been heading to make stress test-related bets. Through midday Thursday, over 230,000 options contracts changed hands on XLF with 217,000 of those contracts being calls, according to Options Monster.
J.P. Morgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC) are XLF's largest and third-largest holdings, respectively, combing for almost 17 percent of the ETF's weight. Throw in an almost three percent allocation to US Bancorp (NYSE:USB), and XLF is heavily weighted to some of the most financially sound banking names.
No one can make any guarantees regarding whether or not those three banks will raise their dividends in the next week, but two things are clear. First, as the case with so many big banks, J.P. Morgan, US Bancorp and Wells Fargo are paying dividends that are nowhere close to pre-financial crisis levels. Second, all three have been trying to do something about, boosting their payouts over the past two years. Bottom line: XLF does offer compelling intimacy to dividend ebullience for the big banks.
Market Vectors Bank and Brokerage ETF (NYSE:RKH) One thing that investors should note about RKH is that the ETF is not a pure play on U.S. banks. In fact, the U.S. accounts for less than 40 percent of RKH's weight. However, the ETF does offer plenty of utility as a stress test play over the next week and that utility comes by virtue of a trait that often unappealing in ETFs.
What that means is RKH is highly concentrated among a few names. The top-10 holdings represent almost 59.4 percent of the ETF's weight, but more importantly, J.P. Morgan, Wells Fargo, Bank of America (NYSE:BAC) and Citigroup (NYSE:C) combine for nearly 28 percent.
With investors eager to see if the Fed will approve share repurchases and dividends by Bank of America and Citigroup, RKH should be in play over the next week.
PowerShares KBW Bank Portfolio (NYSE:KBWB) The PowerShares KBW Bank Portfolio does not garner the attention that XLF or some of the other big bank ETFs do, but KBWB does have over $100 million in assets and volume is strong at over 671,000 shares.
More important than those superficial statistics is how KBWB is a useful stress test play. Simply put, investors looking to profit from potentially good news out of BofA or Citi without wanting to make a stock-specific bet need to consider KBWB. Those names combine for over 19 percent of KBWB's weight.
Additionally, KBWB features ample exposure to some of the more controversial regional names, such as SunTrust (NYSE:STI) and Regions (NYSE:RF), that could (emphasis on "could") benefit from stress test news as well.
KBWB is not bereft of high quality names, though. J.P. Morgan, Wells Fargo, U.S. Bancorp and BB&T (NYSE:BBT) combine for nearly 24 percent of the fund's weight.
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