Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect regional banks to perform well because of their generally more conservative lending nature, the SPDR S&P Regional Banking ETF (NYSE: KRE) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.
The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The SPDR ETF's expense ratio -- its annual fee -- is a relatively low 0.35%.
This ETF has generated some mixed results, beating the world market over the past one and three years, but underperforming it over the past five. (That's not terribly surprising since the huge credit crisis happened during that period.) As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
With a low turnover rate of 13%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.
What's in it?
Several regional banks turned in solid performances over the past year. Regions Financial (NYSE: RF) gained 17%, for example, paying back TARP loans and improving its credit quality and capital position. Aside from a sluggish lending environment, one other threat it faces (along with its peers) is the reining in of fees charged for overdraft protection, thanks to regulations from the Consumer Finance Protection Bureau. It's estimated that sum might top $60 million for the bank, or 4% of its revenue (and its revenue has been shrinking lately).
Synovus Financial (NYSE: SNV), up 7%, has also been improving its credit quality, as part of a turnaround plan that seems to be working. The bank has reported several quarters in the black now. It doesn't expect to pay off its TARP money until next year, though, and it still has non-performing assets on its books.
Huntington Bancshares (Nasdaq: HBAN), meanwhile, also up 7%, has been working to drastically reduce its loan-loss provisions while its business loans and demand deposits have been growing by double digits. Its 2.5% dividend yield might not be tantalizing, but it does sport a lot of room to grow.
Other companies didn't do as well last year, but could see their fortunes change in the coming years. KeyCorp (NYSE: KEY), for example, gained just 2%, but has seen its business loans surge, while its overall loan portfolio has been swelling -- in part due to its acquisition of 37 banks from HSBC. Bears worry about shrinking revenue, though.
The big picture
Demand for banking services isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.
These are not the only intriguing bank stocks out there. Our banking analysts can introduce you to The Stocks Only the Smartest Investors Are Buying and let you in on some tips that Warren Buffett has used to rate stocks in this sector.
