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Q1 Earnings Trend Spells Trouble For Bank ETFs

The financial sector has been on a rough ride since the start of the year even though the broader market sentiments have shown recovery. Most of the pain came from the banking sector, which had a worst start to the year since the financial crisis in 2007-2008, as lower interest rates continued to restrict profitability by shrinking the interest rate spread. This is because banks seek to borrow money at short-term rates and lend at long-term rates. Now, if short-term rates do not rise and long-term rates fall, banks will earn less on lending and pay more on deposits, thereby leading to a tighter spread. Additionally, concerns about slow growth in China and the impact of persistently low oil prices on the energy sector have put pressure on investment banking and trading activities as well as loan growth. According to Dealogic, global investment banking revenues (fees paid for advice on mergers and acquisitions, debt and equity underwriting and syndicated loans) plunged 36% year over year in the first quarter to $12.8 billion. This represents the lowest quarterly number since the height of the financial crisis. The continued market turmoil has pushed down trading activities across the globe with banks witnessing a drop of as much as 56% in their trading businesses. Further, banks that are highly exposed to the energy sector have increased their loan reserves due to a prolonged decline in crude oil prices. The higher provisioning to cover the bad loans of the energy companies are weighing on the overall banking earnings picture and could result in deteriorating credit quality. Given the spiral of woes, analysts expect an average decline of 20% in earnings from the six largest U.S. banks, according to Reuters . In particular, Goldman Sachs (NYSE: GS ) is expected to post the largest decline of 54.2% when it releases its results before the market opens on April 19, as per the Zacks Estimate. This is followed by expected earnings decline of 41.68% for Morgan Stanley (NYSE: MS ), 31.43% for Citigroup (NYSE: C ), 18.52% for Bank of America (NYSE: BAC ), 13.29% for JPMorgan (NYSE: JPM ) and 5.45% for Wells Fargo (NYSE: WFC ) when they report in the coming days. Further, these banks have an unfavorable Zacks Rank of #4 (Sell) or #5 (Strong Sell) with VGM Score of D or F, suggesting that they will underperform the market when the results are released. Moreover, the downside in this corner can be confirmed by the Zacks Industry Rank, as five out of seven banking industries actually have a negative rank in the bottom 40% at the time of writing. All these indicate significant weakness in the broad financial sector given that the banks are the major contributors to its growth (see: all the Financial ETFs here ). As a result, investors should avoid bank ETFs heading into the earnings season. Below, we take a closer look at four bank ETFs that have lost in double digits so far this year. Though these funds might have a Zacks ETF Rank of 3 or ‘Hold’ rating, the weakness is expected to continue given the bearish earnings outlook. PowerShares KBW Bank Fund (NYSEARCA: KBWB ) This fund provides exposure to 24 stocks by tracking the KBW Nasdaq Bank Index. It is moderately concentrated across various components with each holding no more than 8.05% share. Though banks account for 84% share, consumer finance and investment companies also take minor allocations in the basket. The fund has amassed $297 million and trades in solid volumes of 387,000 shares per day on average. Expense ratio came in at 0.35%. The ETF has shed 13.6% in the year-to-date time frame. SPDR S&P Bank ETF (NYSEARCA: KBE ) This fund tracks the S&P Banks Select Industry Index and has an AUM of $2.2 billion. Volume is heavy as it exchanges nearly 3 million shares a day while the expense ratio is 0.35%. The product holds a diversified basket of 64 stocks with none holding more than 2.18% of total assets. From a sector look, about three-fourths of the portfolio is allotted to regional banks while diversified banks, thrifts & mortgage finance, asset management & custody banks and other diversified financial services take the remainder. The fund has lost about 12% so far this year. SPDR S&P Regional Banking ETF (NYSEARCA: KRE ) With AUM of nearly $1.7 billion and average daily volume of around 6.3 million shares, this product follows the S&P Regional Banks Select Industry Index, charging investors 35 bps a year in fees. Holding 100 securities in its basket, the fund is widely spread out across each security, with none holding more than 2.77% of assets. The fund is down 11.6% in the year-to-date time frame. iShares U.S. Regional Banks ETF (NYSEARCA: IAT ) This ETF offers exposure to 54 regional bank stocks by tracking the Dow Jones U.S. Select Regional Banks Index. The top two firms – U.S. Bancorp (NYSE: USB ) and PNC Financial Services (NYSE: PNC ) – dominate the fund’s return with a combined 29.5% of assets. Other firms hold less than 7.4% share. The fund has amassed $390.5 million in its asset base while sees good volume of 308,000 shares a day. It charges 44 bps in annual fees and has shed 10.7% so far this year. Original Post

Pain Or Gain Ahead For Bank ETFs?

The going has been tough for bank ETFs for quite some time now mainly due to the twin attacks of a delay in further Fed rate hikes after a liftoff in December and the energy sector lull. Moreover, UBS Group AG’s (NYSE: UBS ) moderate earnings for the fourth quarter of 2015 triggered a sell-off in banking stocks because the bank pointed to several macroeconomic headwinds and geopolitical issues that will bother its operations in the near term. Not only banking stocks, broad-based risk-on sentiments took a backseat in the first quarter of 2016. Now, with the earnings season impending and the broader markets rebounding, albeit slowly, let’s catch a glimpse of the looming headwinds and tailwinds to the banking sector. Headwinds Tightening Yields: The benchmark U.S. 10-year Treasury note yield slipped to 1.76% on April 6, 2016 (down 48 since the start of the year) while the yield on the short-term Treasury note (one year of maturity) fell to 0.55% on the same day (down just 6 bps since the beginning of 2016). The narrowing gap between the short and long-term yields has been a cause of concern for the backing sector (read: Bank ETFs Hurt by the Dovish Fed ). In fact, in early March, the spread between the two-year and 10-year Treasury yields tapered the most since 2009. Narrowing spread between long- and short-term rates hurts net interest margin, which a key metric for the banking sector. Energy Sector Exposure: U.S. banks have significant exposure to the long-ailing energy sector where chances of credit default are higher. In February, the S&P cut its outlook on several regional banks with the highest energy sector exposure citing a likely increase in non-performing assets. Among the biggies, Wells Fargo (NYSE: WFC ) reported around $42 billion oil and gas credit in February. The situation is the same for JPMorgan (NYSE: JPM ), the energy loan of which accounts for 57% of the investment-grade paper. JPMorgan has ‘ set aside $600 million’ for loan losses emanating from the energy, metals and mining sectors. Panama Papers Scandal: The leaked documents from Panama Law firm Mossack Fonseca & Co. revealing global business leaders and officials moving money to international tax havens may take a toll on bank stocks. Banks may now face more stringent scrutiny and litigation issues to arrest means of evading taxes. Tailwinds Increased Activity: Having described the stress situation, we would like to note that fears of a 2008-like recession or financial market crash are perhaps exaggerated. The lower interest rates should boost capital market activities and benefit banks in other ways. After all, bank stocks have gained their lost ground in the U.S. in a rock-bottom interest rate environment (see all Financials ETFs here). Compelling Valuation: The finance sector has a current-year P/E of 12.6 times, reflecting a 27.6% discount to the S&P while its next-year P/E stands at 11.5 times, reflecting a 25.3% discount to the S&P 500. Such an intriguing valuation might also help the sector to score gains as and when favorable industry dynamics hit the space. ETF Impact All in all, bank stocks are on the fence with pain and gain on either side, though downside risks look higher at the current level. So, investors seeking a financial sector exposure can have a look at the following ETFs: The PowerShares KBW Bank Portfolio ETF (NYSEARCA: KBWB ) , with considerable exposure to Wells Fargo, JPMorgan and US Bancorp (NYSE: USB ). The fund has a Zacks ETF Rank #3 (Hold) with a High risk outlook. SPDR S&P Bank ETF (NYSEARCA: KBE ) also has similar holdings; but it holds stocks in an equal-weighted manner. No stock accounts for more than 2.19% of the fund and diversifies stock-specific risks pretty well. KBE has a Zacks ETF Rank #3 with a High risk outlook. SPDR S&P Regional Banking ETF (NYSEARCA: KRE ) takes into account companies that do business as regional banks or thrifts. KRE also has a Zacks ETF Rank #3. iShares MSCI Europe Financials Sector Index ETF (NASDAQ: EUFN ) measures the combined equity market performance of the financial sector of developed market countries in Europe. The fund has a Zacks ETF Rank #3. Link to the original post on Zacks.com

5 ETFs To Buy If Oil Stays At $40

Finally, oil jolted higher in the April 8 week to near $40/barrel, snapping a drawn-out downtrend. The WTI crude oil fund, the United States Oil ETF (NYSEARCA: USO ), added about 7.5% in the last five trading sessions (as of April 8, 2016), and Brent crude oil fund, the United States Brent Oil ETF (NYSEARCA: BNO ), tacked on about 8.1% gains during the same time frame. The impressive gains were prompted by the impending OPEC-Russia meeting in Doha on April 17 to talk about an output freeze and a decline in U.S. stockpiles. As per the U.S. Energy Department’s weekly inventory release, crude stockpiles reported a surprise reduction from their all-time high levels. The report released last week showed that crude inventories fell by 4.94 million barrels for the week ending April 1, 2016, beating the expectation of a rise in inventory by 2.9 million barrels . While many are not too hopeful about a game-changing outcome at the Doha meeting, the fact is that inventory levels are finally declining . U.S. energy firms used a lesser number of oil rigs for the third successive week to touch ” the lowest level since November 2009″. If this is not enough, the demand scenario should improve in the days ahead on easy money policies in most developed countries. Since the oil patch has been under pressure since mid-2014, the time of rebalancing should approach fast. Added to this, the U.S. dollar is expected to remain benign for a few more days, as the Fed is in no hurry to hike interest rates. This, in turn, should buoy most commodity prices, including oil. Given the newfound optimism in the oil patch, many investors have turned bullish on the energy sector. While playing oil ETFs is always an option, there are other corners as well that are linked to the commodity oil and are likely to bounce back along with the oil price. Below, we highlight five mixed ways which could be profitable if oil price hovers around the $40 level. Leveraged Oil – Direxion Daily Energy Bull 3x Shares ETF (NYSEARCA: ERX ) This fund creates a triple (3x or 300%) leveraged long position in the S&P Energy Select Sector Index while charging 95 bps in fees a year. It is a popular and liquid option in the energy leveraged space with AUM of $507.6 million and average trading volume of 6.2 million shares. The ETF gained 6.8% in the last five trading days (as of April 8, 2016) and added about 6.2% on April 8. Energy E&P – SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA: XOP ) This fund holds 60 oil & gas exploration and production stocks in its portfolio. It is well-diversified across its holdings, with none of the companies accounting for more than 2.25% of total assets. The ETF has been able to manage $1.93 billion in its asset base. It charges 35 bps in annual fees and expenses. The product gained 5.2% in the last five trading days and was up 3.7% on April 8. It has a Zacks ETF Rank #5 (Strong Sell) (see all energy ETFs here ). Russia – Market Vectors Russia ETF (NYSEARCA: RSX ) The Russian economy may not be in a great shape, having shrunk 3.7 % in 2015. But an oil price recovery could bring good luck to Russia investing. Oil is seemingly the main commodity of the nation, and thus, drives the economy’s revenue to a great extent. RSX is the most popular and liquid option in the space, with an asset base of $1.90 billion and average trading volume of more than 13 million shares a day. The energy sector accounts for about 40% of RSX, which charges 61 basis points in expense fees. The Zacks ETF #3 (Hold) fund advanced about 0.9% in the last five trading days (as of April 8, 2016) and added about 2.5% on April 8. Norway – Global X MSCI Norway ETF (NYSEARCA: NORW ) Norway is among the top 10 nations among oil exporters, and the commodity forms an integral part of the country’s GDP. The most popular way to play the country is with NORW. The product charges investors 50 basis points a year in fees. Norwegian oil giant Statoil (NYSE: STO ) accounts for about 15% of the portfolio alone, suggesting a heavy concentration. NORW added 2.8% on April 8, 2016. The fund has a Zacks ETF Rank #3. Canada – iShares MSCI Canada ETF (NYSEARCA: EWC ) Canada is also among the world’s top oil producers. The best way to invest in Canada is through EWC, a product that has nearly $2.59 billion in assets. The fund holds just under 95 stocks in its basket. Energy makes up a huge chunk of its assets, accounting for one-fifth of the total. The fund was off about 0.4% in the last five trading sessions, but returned about 2.1% on April 8. It has a Zacks ETF Rank #3. Original Post