Buy Oversold Bank Stocks With These ETFs

Many investors are interested in buying oversold bank stocks right now. Renowned banks that have little to do with the collapse of Silicon Valley Bank are now trading well below their 52-week highs and at sizable discounts to book value. 

Unfortunately, it can be difficult to be opportunistic when you are worried that a position can become a zero overnight. This is why it can be beneficial to invest in bank ETFs instead of picking individual bank stocks. This approach allows investors to take advantage of some of these bargain-bin valuations and gain exposure to a rebound in the banking sector as a whole without exposing themselves to single-stock risk. Therefore, here are three bank ETFs that can help investors achieve this.

SPDR S&P Bank ETF (KBE) 

The SPDR S&P Bank ETF is part of the popular SPDR series of ETFs from State Street, in this case, focused on banks. KBE seeks to provide investment results that correspond to the total return performance of the S&P Banks Select Industry Index before fees and expenses. 

As mentioned above, the diversification of ETFs is particularly appealing right now when investing in banks, and KBE delivers this diversification in spades. KBE holds 98 positions, and not a single one of these positions makes up more than 2% of the fund. Its top 10 holdings make up just 17.3% of assets, giving investors tremendous protection from the possibility of another bank going under. Top holding Voya Financial makes up just 1.9% of assets.

Below is a look at KBE’s top holdings using TipRanks’ holdings tool.

KBE features a reasonable expense ratio of 0.35% and adds to its appeal with a dividend yield of 3.6%. With a reasonable expense ratio, attractive dividend yield, and broad diversification across the banking industry, KBE offers investors a great way to play the theme of an eventual rebound in the banking sector. 

What is the Price Target for KBE Stock?

While analysts collectively view KBE as a Hold, the average KBE stock price target of $49.74 implies upside potential of 31.3% from current prices. Of the 519 ratings on the ETF, 49.13% are Buys, 45.86% are Holds, and 5.01% are Sells.

TipRanks uses proprietary technology to compile analyst forecasts and price targets for ETFs based on a combination of the individual performances of the underlying assets. By using the Analyst Forecast tool, investors can see the consensus price target and rating for an ETF, as well as the highest and lowest price targets.

TipRanks calculates a weighted average based on the combination of all the ETFs’ holdings. Then, the average price forecast for an ETF is calculated by multiplying each individual holding’s price target by its weighting within the ETF and adding them all up. 

Invesco KBW Bank ETF (KBWB)

Like KBE, the Invesco KBW Bank ETF features an expense ratio of 0.35%. It also features a similar dividend yield of 3.7%, and KBWB seeks to track the performance of the KBW Nasdaq Bank Index. 

Where KBWB differs from KBE is when it comes to diversification. While KBE has 98 holdings and no position making up more than 2% of assets, KBWB holds 23 positions. Furthermore, its top 10 holdings make up nearly 70% of assets, as opposed to just 17% for KBE, and the top holding, JPMorgan Chase, makes up nearly 10% of the fund. 

KBWB’s holdings are also more skewed towards the major large-cap banks than KBE, although this may not be a bad thing in the current environment where regional banks are facing serious challenges in the wake of the SVB collapse. 

Below is an overview of KBWB’s top holdings using Tipranks’ holdings tool.

From the list above, stocks like JPMorgan, PNC Financial, US Bancorp, Bank of New York Mellon, and Northern Trust Corporation all have Smart Scores of 8 out of 10 or above, which are considered Outperform ratings. On the other hand, investors should be aware that top holdings Bank of America and Citigroup feature Smart Scores of 1 and 2 out of 10, respectively, which are considered Underperform ratings. 

The Smart Score is TipRank’s proprietary quantitative stock scoring system that evaluates stocks on eight different market factors, such as analyst ratings, corporate insider transactions, hedge fund activity, and more. The score is data-driven and does not involve any human intervention. Six of the eight market factors which are incorporated into the Smart Score calculation are unique to TipRanks.

Interestingly, while it only holds 23 positions, KBWB holds several of the regional banking stocks from the western United States that have been lumped in with Silicon Valley Bank, such as First Republic Bank, Western Alliance Bancorp, and Zion Bancorporation. 

Overall, the KBWB ETF packs a punch and comes with some considerable upside potential (see below). The expense ratio and dividend yield are similarly attractive to KBE. The one caveat here is that there isn’t a lot of diversification, but more exposure to big banks rather than regional banks could be a benefit in the current climate.

What is the Price Target for KBWB Stock?

Analysts are bullish on KBWB, calling it a Moderate Buy. The average KBWB stock price target of $57.95 offers ample upside potential of 35.2% versus current prices. Of the 275 ratings on the ETF, 50.18% are Buys, 42.91% are Holds, and 6.91% are Sells.

First Trust Nasdaq Bank ETF (FTXO) 

Similar to KBE and KBWB, the First Trust Nasdaq Bank ETF offers investors an attractive dividend yield of 3.6%, and it seeks to track the performance of the Nasdaq US Smart Banks Index. 

First Trust Nasdaq Bank ETF is slightly more diversified than KBWB but not nearly as diversified as KBE. It holds 29 positions, and its top 10 holdings make up 62.4% of the fund. Like KBWB, JPMorgan is the top holding and makes up over 10% of assets.

FTXO’s holdings are a mix of major banks like JPMorgan, Wells Fargo, and Citigroup, with regional banks like New York Community Bancorp and KeyCorp. FTXO also holds some of the banks that have been “thrown out with the bathwater” in the Silicon Valley Bank collapse, like Western Alliance, Zion, and First Republic. The fund even holds Silvergate Capital, which recently announced that it will liquidate. 

One key difference between FTXO and the previous two names is that it’s a much smaller ETF, with just $171.2 million in assets under management (KBE is a $1.2 billion ETF, for reference). One downside here is that FTXO features a higher expense ratio than the two larger ETFs, with an expense ratio of 0.6%.  

What is the Price Target for FTXO Stock?

Analysts say that FTXO is a Moderate Buy, and the average FTXO stock price target of $29.31 represents upside potential of 36.1% from current levels. Of the 294 analyst ratings, 50% are Buys, 43.54% are Holds, and 6.46% are Sells.

Looking Ahead 

Overall, all three of these ETFs offer considerable upside potential for when the market eventually puts the Silicon Valley Bank situation in its rearview mirror. While the industry certainly has some challenges to get through, valuations and dividend yields look attractive, and risk could be lower going forward now that the Federal Reserve is stepping in to help backstop struggling banks.

Many of these are blue-chip stocks that probably aren’t going anywhere. There is certainly still some risk here, but using an ETF approach can help to mitigate the risk of investing in a single bank stock that goes bust while giving investors exposure to the upside of a rebound in the sector.  

Of the three choices here, KBE looks like the most appealing way to play this eventual rebound, as it offers incredible diversification. KBE has an attractive dividend yield (as do KBWB and FTXO) and a reasonable expense ratio of 0.35% (which is the same as KBWB’s), making it the strongest choice of the three, in my opinion. 

Disclosure