SET Monthly Issue April 2016
The Changing Face Of Main Street
Not long ago, the best looking and most prosperous appearing building in small town America was the bank. And before 1999, back in the days before lobbyists and politicians dismantled the Glass-Steagal Act of 1933, a community bank was the backbone of local finance.
Community banks didn’t go away after passage of the Gramm–Leach–Bliley Act in 1999.
But the legislation allowed the big banks to keep getting bigger. After more than 60 years of separation, they could once again align themselves with investment banks and securities firms.
The big banks like Chase, Wells Fargo, and Bank of America are making life miserable for small town, community banks.
Community bank deposits as a share of overall bank deposits has been on a downhill slide. Between 1985 and 2003, they were almost cut in half. Since then, it’s only grown worse.
VANISHING VAULTS IN AMERICA’S SMALL TOWNS AND CITIES
There were 17,901 community banks in 1984. By 2011, only 7,357 remained.
Today, community banks tend to focus on a specific geographic area, or on a specific type of customer in a geographic area. The “all things to all people” approach has proven difficult, even deadly for community banks.
But as the banks identify new ways to compete and new opportunities to differentiate themselves from the big banks, we are seeing signs of a turnaround for the sector.
These trends have drawn our attention to The First Trust NASDAQ ABA Community Bank Index Fund $QABA.
The ETF is designed to mirror the NASDAQ ABA Community Bank Index. It tracks stocks on the NASDAQ for banks and bank holding companies that exclude the top 50 banks, based on banks’ asset size.
WHY THIS IS A GOOD TIME TO INVEST IN COMMUNITY BANKS
Two factors are at play. One is the expectation of rising interest rates and the other is the reality of growing competition.
The expectation of interest rates gives community banks an opportunity to increase margins and the profitability of loans. This is not a cure-all for the sector’s challenges, but it will help.
More significant is the ability of the small bank to compete.
A recent KMPG survey of community bank CEOs has revealed a few important trends. One is the belief among CEOs that regulatory pressures and interference from overzealous examiners seems to be tapering off.
The other two industry trends that catch our attention involve customer segments and M&A.
There has been a merger and acquisitions frenzy. It shows few signs of slowing down. Translating this M&A into a specific benefit for stock prices is difficult, because much of the activity involves banks that are privately held.
But the trend suggests consolidation, improved operating efficiencies, and the distinct possibility of buyouts that benefit shareholders.
IT’S ALL ABOUT THE CUSTOMER
What will banks… any bank, large or small, look like in a few years? How will mobile banking and emerging financial technologies ranging from QuickenLoans to PayPal impact banks?
It’s tough to tell, but what we do know is the smart small banks are sharpening their focus and targeting more specific customer segments.
In the KMPG survey, 22% of America’s community bank CEOs identified the “underbanked” as the greatest growth opportunity; 19% identified people approaching retirement; 16% pointed to top income earners.
We see these segments driving community bank revenue growth. Wealth management and cross selling will be key.
A GOOD TIME TO MOVE IN ON MAIN STREET
We are recommending The First Trust NASDAQ ABA Community Bank Index Fund $QABA.
The ETF has retreated from recent highs and trades at a reasonable P/E Ratio of 14.
The ETF has been trading in a fairly tight channel for the past few weeks. Technical traders will note that it has tested a support level of $32.00 five times since the beginning of 2014 and has gone up each time.
We see no reason why the QABA cannot inch back above $40.00 in the near-term, and then push higher.
PROFILE: THE FIRST TRUST NASDAQ ABA COMMUNITY BANK INDEX FUND (NYSE) $QABA
| Net Assets: | $160.76 Million | ||
| Exchange: | NYSE | ||
| Recent Share Price: | $35.87 | ||
| Average Daily Volume: | 52,830 (past 90 days) |
TOP FIVE HOLDINGS AND PERCENTAGE WEIGHT
| Company Name | Ticker | % Weight | ||||
| Signature Bank | SBNY | 4.18% | ||||
| TFS Financial Corp | TFSL | 2.87% | ||||
| Zions Bancorp | ZION | 2.86% | ||||
| East West Bancorp Inc | EWBC | 2.66% | ||||
| PacWest Bancorp | PACW | 2.53% | ||||
| 02/26/16 | ||||||
Trade Alert
Buy: The First Trust NASDAQ ABA Community Bank Index Fund $QABA up to $38.00.
Recent Price: $35.87
Price Target: $46.00
Stop Loss: $31.90
Frosting On The Cake
This ETF pays a modest dividend of 1.54%. The annual payout is $0.57. There has not been a dividend increase over the past year.
(If you are looking for a high dividend ETF, take a look at our March recommendation, The Aberdeen Chile Fund $CH. It pays a 9.32% dividend.)
Sector Snapshots
Consumer Discretionary
For the month of March, our Market Vectors Retail ETF $RTH finished up 3.3%. The ETF is trading at $76.47.
Buy up to $77.50.
Consumer Staples
We reached our price target and recommended you sell Consumer Staples Select Sector SPDR $XLP in our March update. This position is closed.
Healthcare
Last month our iShares US Medical Devices ETF $IHI finished up 4.5% and exceeded our buy up to price of $120.00. Move this position to a hold.
Homebuilding
For the month of March, our SPDR S&P Homebuilders ETF $XHB finished up 6.8%.
Continue holding.
Utilities
Our Utilities Select Sector SPDR $XLU finished up 7.7% for the month of March.
Continue to hold.
Global
Our Aberdeen Chile Fund, Inc. $CH finished up 7.1% last month.
Continue holding.
Portfolio Changes
- Buy The First Trust NASDAQ ABA Community Bank Index Fund $QABA up to $38.00.
- Move iShares US Medical Devices ETF $IHI from Buy to Hold.
Category: SET Monthly Issues
