KBWB: PowerShares KBW Bank ETF

KBWB: PowerShares KBW Bank ETF

Despite the financial crisis of 2008, as of 2015, the banking industry has performed well for investors, both historically and in recent years. Commercial banking and investment banking, along with the insurance industry, constitute the bulk of the financial sector. Measured by total market capitalization or total revenues, the financial sector has outperformed virtually every other sector or industry in the market since 2010. The sector continues to expand as banks and other financial institutions offer an increasingly wide variety of services to their customers.

In the United States, the banking industry is divided into two major segments, the major banks, such as Wells Fargo and JPMorgan Chase, and a number of smaller, regional banks. The industry is also divided into commercial banks that service the account and financing needs of consumer and corporate customers, and investment banks that provide capital for mergers and acquisitions, underwrite initial public offerings, or IPOs, and act as advisers to corporations and high net worth individuals.

Bank stocks, although potentially very profitable, can be among the most difficult for investors and analysts to evaluate. This is primarily due to the unique nature of the banking industry. Virtually every other industry offers a product or service it sells for money, but for the banking industry, much of the product it sells, in terms of loans, is money itself. The financial statements of banks are both lengthy and complex. Bank ETFs provide investors the opportunity to gain a broad exposure to the banking industry without having to undertake complex analysis of individual bank stocks.

The PowerShares KBW Bank Portfolio ETF (NYSEARCA: KBWB) provides excellent broad exposure to the overall U.S. banking industry by tracking a modified market capitalization-weighted index of a wide selection of major and regional U.S. banks. The underlying index for the fund, the KBW Bank Index, aims to mirror the overall performance of publicly traded major money center banks, regional banks and thrifts. The fund typically invests a minimum of 90% of its assets in securities that comprise the index. Among the fund's primary holdings are Wells Fargo, JPMorgan Chase, Citigroup, Fifth Third Bancorp and BB&;T.

Characteristics

This ETF from Invesco's PowerShares, launched in 2011, has total assets of nearly $500 million, with approximately 12 million shares outstanding, and an average daily trading volume of over 100,000 shares. The expense ratio for the fund is a relatively low at 0.35%, and the fund offers a dividend yield of 1.4%. The weighted average market cap of the fund's holdings is approximately $91 billion. The weighted average price-to-earnings, or P/E, ratio of the stocks included in the fund is 14.7, and the weighted average price-to-book, or P/B, ratio of fund stocks is 1.2. The fund's three-year annualized return is 21.6%, well above the overall market average.

Suitability and Recommendations

The PowerShares KBW Bank Portfolio ETF is most appropriate for investors seeking to obtain exposure to the overall U.S. banking industry, including major money center banks and regional banks and thrifts. Since the fund is solely comprised of U.S. banking institutions, it is not well-suited to investors seeking a wider exposure to the global banking industry, nor to investors seeking a fund with a narrower focus on either major U.S. banks or just regional banks.

The low average P/B ratios of the fund's stocks may make it appealing to value investors, and its performance definitely makes it a fund for consideration by growth investors. The fund's relatively low dividend yield likely does not make it particularly attractive to income investors.

Because of the relatively higher volatility associated with financial stocks, the fund is rated as relatively high risk, and therefore is not appropriate for investors who have a low-risk tolerance or are uncomfortable with holding potentially volatile investments.

The Sharpe ratio risk-adjusted measure of return for the fund is above average, at 1.57. The three-year average beta for the fund is 1.05, indicating its tendency to be somewhat more volatile than the market average.