Top bank stocks are breaking out or near buy points as tapering talk heats up and the chance grows for higher interest rates next year.
Last month, the Fed said tapering of asset purchases “may soon be warranted” and could be completed by the middle of next year. More Fed policymakers also see the central bank’s key interest rate rising in 2022, which would give big banks more leeway to raise rates on their loans, boosting profits.
Vanguard Financials ETF (VFH), with $11.2 billion in assets, is the biggest of the trio. It tracks the MSCI US Investable Market Index (IMI)/Financials 25/50, which comprises large, midsize and small U.S. financial stocks. VFH will mark its 18th anniversary in January.
Diversified banks accounted for the biggest sector weight as of Aug. 31, at nearly 24% of assets. Regional banks were next at 14% and asset management & custody banks 10%. Investment banking & brokerage and financial exchanges & data were about 9% each, and multi-sector holdings and property & casualty insurance 7% apiece. Smaller positions in other financial sectors made up the rest.
JPMorgan Leads Top Bank Stocks
Top 10 holdings through the end of August included JPMorgan, Berkshire Hathaway (BRKB), Bank of America, Wells Fargo (WFC) and Citigroup (C) and Goldman Sachs (GS). Together, the top 10 totaled 42% of the 396-stock portfolio.
JPMorgan stock, up more than 30% this year, is near the top of a buy range from a 163.93 entry of a cup with handle. Berkshire Hathaway has gained over 20% this year and has been building a flat base for 22 weeks. Goldman, up nearly 50% year to date, is also shaping a flat base.
VFH is in buy range from a 94.88 buy point of a flat base, according to MarketSmith chart analysis. It first cleared the entry in early August before pulling back, but has found support along the rising 10-week moving average. The ETF charges 0.10%.
Up next is Invesco KBW Bank ETF (KBWB), which tracks the KBW Nasdaq Bank Index. The index is composed of national money center banks, regional banks and thrifts traded in the U.S. KBWB turns 10 years old next month.
Top 10 holdings, which represented 60.5% of the 26-stock portfolio, include U.S. Bancorp (USB), Bank of America, JPMorgan, Wells Fargo and Citibank. SVB Financial Group (SIVB) and Fifth Third Bancorp (FITB) are among smaller banks, comparatively speaking, in the top 10.
KBWB remains in buy range from a 68.09 entry of a four-month cup with handle cleared late last month. It charges a 0.35% expense ratio.
Flirting With A Breakout
Fidelity MSCI Financials ETF (FNCL) is the youngest of the three with an inception date of Oct. 21, 2013. The $1.8 billion fund tracks the MSCI USA IMI Financials Index.
Its top 10 holdings include JPMorgan, Berkshire Hathaway, Bank of America, Wells Fargo, Citigroup, Morgan Stanley (MS) and Goldman Sachs. The top 10 accounted for 41.5% of the 389-stock portfolio as of Sept. 30.
FNCL climbed past a 55.85 buy point of a six-week flat base on Thursday, before pulling back to close below the entry. It charges 0.08%.
Keep in mind that with the market in correction, all purchases are highly risky. But initiating very small positions in certain top-performing industry groups is still a viable option. And ETFs hold a basket of stocks, which lessens risk.
Follow Nancy Gondo on Twitter at @IBD_NGondo
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