The financial services sector is shedding its laggard status in noteworthy fashion. Just look at the Financial Select Sector SPDR (NYSEARCA:XLF), the largest financial services exchange-traded fund (ETF) by assets.
The benchmark financial services ETF is higher by more than 9.3% over the past month, pushing its year-to-date gain to north of 13%. Enthusiasm for financial services ETFs is evident and growing. On Thursday, including XLF, more than 20 ETFs tracking the sector hit 52-week highs.
Although the fourth quarter is still fresh, only three ETFs have added more new assets to start the quarter than XLF. That is after investors added nearly $1.9 billion to XLF in third quarter, a total topped by just eight other ETFs.
While there are some compelling opportunities among non-bank financial services stocks, investors may want to focus on bank ETFs for the fourth quarter. Near-term catalysts include a deluge of big bank third-quarter earnings reports next week and the possibility of an interest rate hike by the Federal Reserve in December.
Here are some bank ETFs for investors to consider as fourth-quarter buys.
Best ETFs to Buy: PowerShares KBW Bank Portfolio (KBWB)
Expense ratio: 0.35% per year, or $35 on a $10,000 investment
Follow bank stocks and ETFs long enough and you are likely to hear an analyst reference the KBW Bank Index. That is one of the most widely followed gauges of bank stocks in the U.S. and the PowerShares KBW Bank Portfolio (NASDAQ:KBWB) is the ETF that tracks that benchmark.
KBWB focuses on large- and mid-cap banks, meanings there are no small-caps found among this bank ETF’s 24 holdings. Citigroup Inc. (NYSE:C), Bank of America Corp. (NYSE:BAC) and Wells Fargo (NYSE:WFC) combine for nearly a quarter of KBWB’s roster.
As has been seen with other bank ETFs, investors have recently been embracing KBWB. The ETF has seen inflows of nearly $41 million over the past three months, according to issuer data.
Best ETFs to Buy: First Trust Nasdaq Bank ETF (FTXO)
Expense ratio: 0.6% annually
The First Trust Nasdaq Bank ETF (NASDAQ:FTXO) is one of the newest members of the bank ETF fray having debuted just 13 months. Still, FTXO is off to a stellar start, at least from an asset-gathering perspective. FTXO is home to over $1 billion in assets under management, making it one of the most successful ETFs to come to market last year.
Among bank ETFs, FTXO is certainly unique. Most funds in this category are cap-weighted or equal-weight, but this First Trust offering goes further into the smart beta universe, using trailing 12-month volatility, cash flow to price and price appreciation metrics as part of its weighting methodology.
FTXO holds 30 stocks with Citigroup, SunTrust Banks Inc. (NYSE:STI) and PNC Financial Services Group Inc. (NYSE:PNC) combining for nearly a quarter of the fund’s roster.
Best ETFs to Buy: SPDR S&P Regional Banking ETF (KRE)
Expense ratio: 0.35% per year
The SPDR S&P Regional Banking ETF (NYSEARCA:KRE) is the largest regional bank ETF and makes for a more nuanced play on bank stocks than traditional bank funds. As an equal-weight ETF, KRE reduces single stock risk as none of its 109 holdings exceed a weight of 2.8%.
As is often the case when bank stocks rally, KRE overshoots the gains of standard bank ETFs. For example, the regional bank ETF is higher by 13% over the past month. However, that is also highlights KRE’s vulnerability to interest rates. Even with that stellar one-month run, KRE is not even higher by 4% year-to-date.
The problem is that although the Federal Reserve has boosted interest rates twice this year, Treasury yields have not risen enough to lift provide notable upside to regional banks’ net interest margins.
Best ETFs to Buy: First Trust Nasdaq ABA Community Bank Index Fund (QABA)
Expense ratio: 0.6% annually
For the investors that wants an even more sophisticated approach to regional banks, the First Trust Nasdaq ABA Community Bank Index Fund (NASDAQ:QABA) is an idea to consider. Said another way, investors yearning for small-cap bank exposure will like QABA as this bank ETF’s 172 holdings have a median market capitalization of just $877 million.
Community banks are usually sensitive to the economic climate in the regions in which they operate. That is an important consideration with an ETF like QABA. Broadly speaking, the U.S. economy is solid, but some regions are more economically desirable than others. Fortunately, First Trust outlines QABA’s exposure on a state-by-state basis.
QABA devotes about 20% of its combined weight to California and Texas, the two largest state economies. This bank ETF has recently been surging with a one-month gain of over 13%.
Best ETFs to Buy: iShares U.S. Regional Banks ETF (IAT)
Annual fee: 0.44%
The iShares U.S. Regional Banks ETF (NYSEARCA:IAT) is not to be confused with the aforementioned regional bank ETFs. IAT, which tracks the Dow Jones U.S. Select Regional Banks Index, is an entirely different beast than competing regional bank funds.
In fact, it can be argued that IAT’s interpretation of regional banks is liberally applied as most of its holdings can be considered super regionals.
Two stocks — US Bancorp (NYSE:USB) and PNC — combine for over 27% of the fund’s weight and most of the ETF’s other top 10 holdings are super regional plays as well.
IAT is a good idea for the conservative investors that wants something a little different than run-of-the-mill financial services without dealing with some of the smaller names found in ETFs such as KRE and QABA.
As of this writing, Todd Shriber owned shares of the XLF exchange-traded fund.