Market Overview

Beyond XLF: 4 Stress Test ETFs (KBE, JPM, BAC)

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The Federal Reserve releases the results of its latest stress test on U.S. banks Thursday and the results will show the ability of the 19 largest U.S. banks to absorb major economic shocks such as 13% unemployment and a 21% tumble in housing prices.

Bank stress tests trace their lineage back to 2009, during dark days of the financial crisis, and became an annual affair last year. According to disclosure templates revealed on Monday, the bank-by-bank financial information this year will be the most extensive yet and will include information that could be prized by investors and financial analysts, such as stress scenario estimates of pre-tax income, total assets and loan-loss provisions, Reuters reported.

Analysts and investors are eagerly awaiting the results of the latest stress test because the results, if positive, are expected to clear the way for major banks such as J.P. Morgan Chase, Wells Fargo (NYSE: WFC) and plenty of others to free up capital for dividends and share repurchases. Going beyond the Financial Select Sector SPDR (NYSE: XLF), the following ETFs could be worthwhile trades following the release of the stress test results.

SPDR S&P Bank ETF (NYSE: KBE) The SPDR S&P Bank ETF doesn't attract nearly the volume or the scrutiny that XLF garners, but this is one of the more important financial services ETFs. KBE has $1.4 billion in assets under management and the ETF has about 35 holdings. With a weight of almost 3.2%, Bank of America (NYSE: BAC) is KBE's second-largest holding, but the ETF is a worth stress test play beyond BofA.

Expectations are in place that the stress tests will result in higher dividends from J.P. Morgan, Wells Fargo, BB&T (NYSE: BBT), US Bancorp (NYSE: USB) and, believe it or not, maybe Citigroup (NYSE: C). Those stocks combine for about 14% of KBE's weight.

Vanguard Value ETF (NYSE: VTV) The Vanguard Value ETF has been a dependable despite an almost 24% allocation to bank stocks, by far the fund's largest sector weight. That includes J.P. Morgan and Wells Fargo in the ETF's top-10 holdings, but VTV is home to over 420 stocks. Nineteen banks are being tested by the Fed and almost all of them are found in VTV so if you don't want a pure play financials ETF, VTV is worth a look.

iShares Dow Jones US Regional Banks ETF (NYSE: IAT) Maybe this one should be called a "super regionals" ETF because that what stocks like U.S. Bancorp and PNC Financial (NYSE: PNC) really are. Add BB&T to the mix and you've got three of the best regional banks representing 41% of IAT's weight. Expect dividend increases and/or buybacks from at least two of those three regional banking powers.

iShares Dow Jones US Broker-Dealers Index Fund (NYSE: IAI) The iShares Dow Jones US Broker-Dealers Index Fund is small (just 25 holdings) and thinly traded (average daily volume: 33,000 shares) compared to most financial services ETFs, but the fund makes our stress test list for one simple reason: Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) combine for almost 16% of the fund's weight and those venerable Wall Street names are being stress tested as well. Hey, Fast Money's Joe Terranova likes Goldman ahead of the stress test.

 

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