SPDR® S&P Bank ETF

The US stock markets turned negative before the market closed yesterday after fully assessing Fed chair Jerome Powell’s speech.

The financial sector could benefit the most from the Fed’s gradual rate hike process.

December is extremely critical for investors in stock markets around the world. Central banks of the two largest economies in the world are expected to make key monetary policy decisions.

Sectors of the S&P 500 Index (SPY) play an important role. When economic activity improves and the market is strong, major sectors perform well.

With so many positive tailwinds for the financial sector, how can investors use ETFs to target this growth?

For years, Puerto Rico has been using tax incentives to attract corporations to do business in its region. Over the last four decades, the agricultural economy has shifted toward the manufacturing and services sectors.

In contrast, however, weak data were reported for U.S. employment, the preliminary University of Michigan Consumer Sentiment Index[2. The University of Michigan Consumer Sentiment Index is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in December 1964. Each month at least 500 […]

In this final part of the series, we’ll try to identify the best-performing sectors after a presidential election. The S&P 500 has generated an annualized return of 7.0% in the last 27 years.

While Donald Trump wants to get rid of the Dodd–Frank Act, especially the Consumer Financial Protection Bureau, Hillary Clinton wants to retain it.

Many economists agree that the United States needs to shift from a reliance on monetary policy to more fiscal stimulus, but it is not clear that the political stars are aligning to do so…

Both the labor force participation rate, which came in at 62.8%, and the employment-population ratio, which came in at 59.7%, were unchanged in August.

Telecom services and utilities, the traditional dividend stars, have provided a fillip to US equities in 2016.

The United States Census Bureau published the US retail sales report for June on July 15. Retail sales rose 0.6% in June on a month-over-month basis.

JPMorgan Chases’s trading and investment banking business recorded healthy growth in the second quarter.

The US dollar index, which measures the strength of the US dollar against the major currencies, was on a bull run on July 11.

In Monopoly, the $200 of credit creation never changes. In the real economy, credit creation isn’t guaranteed to occur at the same pace each year.

The non-manufacturing PMI is published by the ISM. It rose to the highest level since November 2015. The non-manufacturing PMI for May rose to 56.5.

Rate-sensitive XLF saw the largest outflows among GICS sector ETFs on a weekly basis. But it was also the biggest fund flow loser in the first half of 2016.

New factory orders in the US fell by 1.0% in May—compared to the forecast of a fall of 0.8%. The factory orders for April were revised down to a rise of 1.8%.

Wells Fargo (WFC) added 350 million shares to its share repurchase authorization in January 2016.

Net interest income makes up 53% of Wells Fargo’s total income. In 1Q16, Wells Fargo had a loan portfolio worth $947 billion.

Wells Fargo (WFC) is the largest mortgage lender in the US, operating primarily as a retail and commercial bank. It is been the most profitable bank in its peer group, posting a return of 10% on shareholder’s equity and ~1.3% on assets in 2015.

With Brexit out of the way, the focus will shift to domestic data releases. This week will see the release of US final GDP and US consumer confidence.

During last week’s volatile trading session, investors pulled money out of all but two US GICS Sector ETFs. All of the sectors closed in negative territory.

Bank of America (BAC) has a credit card loan portfolio worth $96.4 billion as of March 31, 2016. It accounts for 22% of its total consumer loans.

The carrying value of Deere & Company’s (DE) long-term debt fell from $24.3 billion in 2014 to $23.8 billion in 2015.

According to George Soros, the Chinese property and construction bubble can grow and feed itself like in the United States in 2005–06.

It’s difficult to determine whether corporate credit is the phoenix or the canary in the coal mine for growth in an economy.

Citigroup is currently one of the stocks paying the lowest dividends in the banking space (KBE). In 2015, the company paid dividends of $0.16 per share.

JPMorgan Chase (JPM) is committed to cost-cutting and optimizing its capital levels. Banks have repeatedly been criticized for their inability to control overhead expenses.

The US dollar index was trading on a lower note on March 31, 2016, at 2:30 PM EST as unemployment added further uncertainty to the US rate hike.

The SPDR S&P Bank ETF (KBE) has a market capitalization of $2.3 billion as of March 24, 2016. Its trading volume is $4.1 billion shares.

On March 18, 2016, Bank of America (BAC) reported that its board of directors has authorized the repurchase of shares worth $800 million.

Goldman Sachs says the Honest Dollar acquisition is part of its continuing effort to boost its asset management business.

Goldman Sachs (GS) is adding more technology to its investment banking arm with its acquisition of Honest Dollar, an Austin-based digital retirement savings tool.

The ADP employment report often acts as a precursor to the Non-Farm Payrolls release by the Bureau of Labor Statistics, which is scheduled for March 4, 2016.

Year-to-date, investors have withdrawn $140 million from KBE. Of this amount, $34 million was withdrawn last week.

KBE invests in a portfolio of publicly traded money centers and leading regional banks. About 80% of its holdings are concentrated in regional banks.

The 4Q15 GDP increased at an annual rate of 1.0% against a forecast of 0.4%. The banking sector took positive cues from the GDP report with major gains in banking stocks.

The Consumer Financial Protection Bureau was established to protect consumers’ interests by implementing federal consumer financial laws.

Exchange-traded fund investors have withdrawn $89.5 million from the SPDR S&P Bank ETF during December. In 2015, KBE witnessed inflows of $49 million.

The SPDR S&P Bank ETF (KBE) seeks to track the returns on the S&P Banks Select Industry Index. It has a market capitalization of $2.6 billion as of January 5.

Among the 133 13F filers holding the stock, 43 funds reduced their exposure to KBE, while 21 funds sold all their holdings.

Since the 2008 financial crisis, the stress test has evolved as an important analytical tool for evaluating capital adequacy under adverse conditions.

Less lending leads to lesser investment and business expansion activities. This infringes on corporate profitability and overall economic profit growth.

Credit growth has started to slow in the Us. From the 12% annualized growth rate of commercial and industrial credit in 2014, the rate is currently around 10.8%.

The Dodd-Frank Act is a financial reform legislation passed in an attempt to prevent events similar to the 2009 financial crisis from occurring again.

Since the financial crisis, the Fed has enforced regulations for the capital strength and liquidity of 16 systematically important financial institutions.

The Fed’s focus in December will likely be on the pacing of subsequent rate hikes rather than on the timing of the first rate hike.

Among the 135 13F filers holding KBE, 36 funds reduced their exposure to the fund, while eight funds sold all their holdings.

On November 6, 2015, KBE closed at $36.59, above its 100-day moving average of $33.34, its 50-day moving average of $34.08, and its 20-day moving average of $34.87.

Money market funds suffer in periods of low interest rates because their yields drop, causing fund managers to lower fees and close access to new investors.

3Q15 earnings offered strong signs that the Dodd-Frank Act is working. Banks are focusing on building their balance sheets and enhancing asset quality.

Global market uncertainty took a toll on US banks’ capital market revenues during 3Q15.

In the third quarter, banks that relied heavily on interest-based income suffered, reporting record-low net interest margins.

In order to boost profitability in a low–interest rate environment, banks are reducing expenses by restructuring their businesses.

First Horizon outperformed its peers based on the forward PE ratio and PBV ratio. The ETFs outperformed First Horizon based on the price movement.

First Horizon National has a market cap of $3.23 billion. After the earnings report in 3Q15, it fell by 1.2% to close at $13.80 per share as of October 16, 2015.

The peers are way ahead of PacWest Bancorp based on the EPS and PBV ratio. The ETFs outperformed it based on the price movement, PE ratio, and PBV ratio.

MB Financial has a market cap of $2.4 billion. After the earnings report in 3Q15, MB Financial rose by 0.1% to close at $31.30 per share as of October 15.

The peers outperformed MGIC Investment based on the forward PE ratio. However, MGIC is way ahead of its peers based on the PBV ratio.

MGIC Investment (MTG) has a market cap of $3.4 billion. After the earnings report in 3Q15, it rose by 4% to close at $10 per share as of October 15, 2015.

The peers outperformed Western Alliance based on the EPS. However, it’s way ahead of its peers based on the forward PE ratio and PBV ratio.

Webster Financial has a market cap of $3.3 billion. After the earnings report in 3Q15, Webster fell by 1.1% to close at $35.35 per share as of October 15, 2015.

In the week ending August 21, US equities saw total outflows of $2.1 billion, compared to outflows of $1.0 billion in the previous week.

In the quarter, Region Financial’s deposit balances increased 4.4% from the same quarter last year, while checking accounts grew 5.7%.

KeyCorp (KEY) is represented in key ETFs focused on the banking sector. The SPDR S&P Bank ETF (KBE) has KeyCorp comprising ~1.7% of its portfolio.

Higher nonperforming loans (or NPLs) indicate poor asset quality. KeyCorp’s nonperforming loans to end-of-period loans ratio is 0.73.

SunTrust Bank’s return on equity is 8%, which is 18% lower than the industry average.

BB&T is more widely represented in ETFs focused on the banking sector. The SPDR S&P Bank ETF (KBE) has BB&T comprising ~1.6% of its portfolio.

BB&T’s Susquehanna acquisition will significantly expand BB&T’s Mid-Atlantic footprint. The deal is valued at ~$2.5 billion. It will close in the second half of 2015.

BB&T entered Texas in 2009 with the acquisition of Colonial BancGroup. BB&T is looking to expand its branch network in Texas.

BB&T’s (BBT) Residential Mortgage Banking segment retains and services mortgage loans originated by the Community Banking segment.

BB&T’s Community Banking segment offers a variety of loan and deposit products and other financial services. The segment’s net interest income decreased in 2014.

BB&T Corporation’s (BBT) operations are divided into six business segments. Community Banking contributes 46% to the total revenue.

The Baupost Group lowered its position in Ocwen Financial (OCN) during 4Q14. The position accounted for 1.77% of the total portfolio in 4Q14.

Regions Financial’s stock price hasn’t recovered since it fell during the crisis. It has the lowest price-to-book ratio of ~0.8 in its peer group.

For a bank, the net interest margin is the difference between the interest income generated and the interest paid out as a percentage of interest-earning assets.

The SPDR S&P 500 ETF (SPY) mirrors the price movement of the S&P 500, so it also gained ~0.93% and closed at 202.01 levels

The U.S. Treasury held the weekly auction for three-month, or 13-week, Treasury bills (or T-bills) on September 15. $24 billion worth of T-bills were on offer. The issue size was lower than the $26 billion auctioned the previous week. The high discount rate was lower at 0.015% in the September 15 auction—compared to 0.02% in the auction held the previous week.

In its most basic form, securitization pools similar forms of debt—like credit cards, car loans, or real estate mortgages (IYR) (VNQ)—into special purpose vehicles (or SPVs). The cash flow from the debt in the SPV is divided into tranches. The tranches have different risk and return characteristics.

Historically, a flatter yield curve had an adverse impact on the financial institutions’ returns. It lowered their net interest margins. The Fed continues to stress an accommodative monetary policy. The policy and strong overseas demand have kept yields low at the long end of the curve. As a result, the difference between 30-year and five-year Treasury yields fell to 154 basis points on September 5, 2014.

Signs of financial stress in Global Systemically Important Banks (or GSIBs)—like Citigroup and JPMorgan (or JPM)—would impact the entire financial system. The signs of stress would impact stocks and bonds (BND). As a result, it’s important that the Fed and other regulators establish a suitable regulatory and supervisory framework.

As a result of the 2008 financial crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. The Act includes provisions for enhanced liquidity. It also includes provisions for capital and risk-management requirements for large financial intermediaries.

Last week, the week ended June 13, the U.S. Treasury held weekly auctions for four-week, 13-week, and 26-week Treasury bills for $30 billion, $25 billion, and $23 billion, respectively.

Financial intermediation can result in concentration of risks that increase the fragility of the financial system. These risks are referred to as systemic risks.