suggestions on bank etfs

MikeW

Hey folks,
I'm looking to purchase a bank etf to increase my exposure to financials. With interest rates finally moving higher and banks well capitalized, I see this as an opportunity. On my longer term screens IAI (brokers and dealers) comes up as a strong candidate. KRE (regional banks) has done quite well since November. Curious if anyone has evaluated funds in this space? Also open to mutual funds with high concentrations in financials. thanks.

LewisBraham

https://etfdb.com/etfdb-category/financials-equities/

Mark

Seriously? ARKF but I'm well aware that it's not for everyone (or maybe anyone but me).

I've tried investing in the financial sector from time to time and my experience has been that it most often ends up as a dead or losing proposition. I've taken to pretty much ignoring the sector and letting my broader based mutual funds or ETF's handle it for me. I should've bought BAC back when it was selling for $2 something though. I just couldn't. Do try to find out what Ms. Wood's and her team has to say about financial innovation though.

sma3

There is a big difference between ARKF ( which has no banks but is almost all internet "finances" ie things like Zillow) and a bank ETF like KBE ( big banks) or KRE (regionals). The latter might be more sensitive to Covid economic effects as lending will take a while to pick up steam.

MikeW

@Mark and @sma3. Thanks for thoughts. Im very familiar with ARKF and its had great performance. But its more like a tech fund than a financial fund. Im looking at this as more a value driven investment vs growth. Admittedly financials havent done great over last several years but I think the dynamics are changing. This includes rising interest rates and banks being able to increase their dividends over next few years. Very curious how anyone on the board is investing in banks? Thru bank etfs, value etfs, or mutual funds?

Mark

This guy was once the primo financial sector mutual fund manager at FBR. I'm not sure if he's in the business still but I did find this.

David Ellison

MikeW

Thanks very much for sharing this @Mark. I appreciate it. Yes he's over at Hennessy and has been for a number of years. Looks like his funds have done well. The only negative is that the expense ratio is 1.83%. Ouch!

wxman123

If you don't mind the closed end space I'm a big fan of BTO. Need to sell the rips and buy the dips with this one (I do with both hands on the big dips). I always remind myself that in the end the bank usually wins! up 44% in past 3 months, no complaints.

MikeW

@wxman123. Thanks much for sharing this one.. i wasnt aware of it. So Im curious what is your strategy for when you sell this fund? Its had a great run since November.

wxman123

MikeW said:

@wxman123. Thanks much for sharing this one.. i wasnt aware of it. So Im curious what is your strategy for when you sell this fund? Its had a great run since November.

Yes, it has...but was looking dreadful during the depths of covid, that's when I was buying like crazy. My strategy is to buy the dips and any time the premium is negative (you need to have some understanding of how to buy/sell closed end funds). Sell when the premium approaches double digits, not necessarily the whole position but enough to lock in profits and buy future dips. You need to embrace volatility with this one, but you'll be rewarded. The bank always wins.

MikeW

@wxman123 thanks for providing your strategy on this one. I haven't done a lot with CEFs so will need to do some reading. Have you added to this recently or are you sitting tight? A week ago when financials sold off probably would have been a good entry. I've been looking at this CEF, and then IAI which is a broker/dealer ETF (GS, and MS are big positions) for purchase. thanks.

carew388

Question for wxman123- So the best time to buy GTO is when the share price is less than the NAV(discount) and sell when the premium approaches its historical average ?

wxman123

Yes, and this is generally true for most CEF's but with caveats...most significantly some CEFs can trade at premiums or discounts for a very long time. I look at the history on MS, and you have to really get a feel for a fund before making significant purchases. One recent example is MPV, a CEF that historically has traded at a premium but since the pandemic at a discount. Its price over the past year is down 25% but its NAV is down under 1% (based on the most recent valuation, this one is not valued daily). I've been buyer here. Another caveat, some CEFs can be thinly traded so if you're patient you can place "stink bids" (limit orders well below the current price) that will randomly execute.

BenWP

Thanks@wxman23 for adding to my investment vocabulary. I’d like to know the origin of “stink bid,” if you know it. I do place orders below the bid price, but I did not know the practice was enshrined in an expression. It takes patience and a willingness to wind up with odd lots. I used to invest in CEFs, although nowadays ETFs are more attractive to me. I can say that my investment style has been known to “stink up the joint” on occasion.

MikeW

Hahaha! Good one @BenWP.... I have my share of stinkers too! Does someone have a good link to share on how taxes on CEFs differ from ETFs? Ben why do you prefer ETFs?

BenWP

@MikeW: when I was teaching I had a friend in Finance and we used to yack it up about equity CEFs. He actually knew something about international finance, while I was an amateur. After I retired I ran into him and I asked if he still was using CEFs; he said no because ETFs gave him all the exposure he wanted to given markets. I found it very hard work to take advantage of spikes or drops in discounts as it entailed frequent trading.

I did maintain a position in HQL, and then in BME, but I now believe that active management in those two healthcare funds added no alpha. I would not discourage an investor from exploring equity CEFs, especially if the goal is equity-income-like returns, especially as many CEFs have had to adopt minimum distribution plans, often in the range of 8% yearly. There is income to be had in those circumstances, but the learning curve could be steep for some. One drawback of equity CEFs is volatility, particularly on the downside. I have gotten more satisfaction and better returns from ETFs like MOAT and CAPE. Recently I added DSTL, DSTX, XBUY, CSB, NUEM, and of course ARKK. Best wishes to you from behind my KN 95.

Mark

According to the most recent findings of AAII the best 3, 5, and 10 year annual return's lies with IYG - iShares US Financial Services and IYF - iShares US Financials.

wxman123

BenWP said:

Thanks@wxman23 for adding to my investment vocabulary. I’d like to know the origin of “stink bid,” if you know it. I do place orders below the bid price, but I did not know the practice was enshrined in an expression. It takes patience and a willingness to wind up with odd lots. I used to invest in CEFs, although nowadays ETFs are more attractive to me. I can say that my investment style has been known to “stink up the joint” on occasion.

I don't know the origin of "stink bid" but the moment I saw it somewhere long ago I knew what it meant! As to trading CEF's, most do ok until a black swan event, when they get crushed, especially those with leverage. Never hold so much that you can't double down when needed. Also know the funds, these animals are owned largely by retail investors who panic at the wrong time, easy to make large gains by timing it right. Then again, I would not invest money I could not afford to lose in most CEFs.

Derf

From above post.
"Never hold so much that you can't double down when needed."
That works in the casino , so (probably) a good idea , NOT !!
Stay Safe , Derf

MikeW

Thanks for providing @Mark. Yes IYG scores well. I was chatting with @Charles yesterday and he had a very helpful suggestion to look at the last time when rates were rising and which financial funds performed well. This was 2016-2018 and you can run screens on this period on MFO premium. IAI was top performer. IAI also is the top performer over 3 and 5 year timeframes. This is a broker/dealer focused fund rather than banks. Im strongly considering it.