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Dividend investors take note: Rising rates will benefit banks

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Not too many years ago, bank stocks were synonymous with dividend growth. In 2007, 60 stocks made the S&P 500 Dividend Aristocrats list, meaning they had increased dividends annually for 25 or more years. Nine of those stocks were banks.

By 2009, not a single bank remained on the list. The intervening financial crisis had forced the banks to turn to the Fed to keep them afloat. Dividends were cut or eliminated.

After the crisis, many investors avoided bank stocks. One ETF provider even launched a dividend-oriented fund that avoided financials. More recently, banks have repaired their balance sheets and received the Fed’s permission to increase dividends. Many have done so. Even Wells Fargo, which recently signed a Fed consent order that limits asset growth, said the bank “remains committed to returning more capital to shareholders.” Wells has increased its dividend annually since 2012.

While the stock market has been spooked by higher global interest rates, advisors know that those higher rates are the result of stronger global economic growth. What’s more, banks can benefit from rising rates since they allow financial institutions to charge more for loans.

For advisors whose clients want to make a tactical allocation to bank stocks, here’s a comparison of the four largest bank ETFs that have been public at least three years:

SPDR S&P Regional Banking ETF (KRE, expense ratio:0.35%) has $4.7 billion in assets and tracks the regional banking segment of the S&P Total Market Index (TMI). As such, it holds positions across U.S. market capitalizations, with a minimum initial market cap requirement of $400 million for inclusion in the index. Although the ETF has an overall small-mid-cap flavor, the fourth-largest position is large-cap BB&T (BBT). Started in 2006, the ETF holds 117 positions and stocks are weighted equally. Through Feb. 6, KRE posted annualized returns of 16.88%, 16.80% and 7.19% for the three-, five-, and 10-year periods, respectively.

SPDR S&P Bank ETF (KBE, 0.35%). Like its sibling KRE, this $4.1 billion ETF is based on a segment of the S&P TMI. The bank index includes asset management & custody banks, diversified banks, regional banks, other diversified financial services, and thrifts & mortgage finance sub-industries. Despite that broad array, the ETF holds only 76 positions because of a minimum $2 billion initial market cap requirement. Positions in the fund, operated since 2005, are equal weighted. Through Feb. 6, KBE posted annualized returns of 15.90%, 15.19% and 3.01% for the three-, five-, and 10-year periods, respectively.

PowerShares KBW Bank Portfolio (KBWB, 0.44%) is a modified-market capitalization-weighted index of publically traded banks and thrifts. The $1.2 billion ETF was launched in 2011 and holds 24 positions. KBWB tracks the KBW Nasdaq Bank index, whose component stocks, subject to certain eligibility requirements, are selected by a committee. That committee includes four members from Keefe, Bruyette & Woods, the investment bank that originated the index, and one member from Nasdaq. KBWB had annualized returns of 17.79% and 16.95% for the three- and five-year periods through Feb. 6.

iShares U.S. Regional Banks ETF (IAT, 0.44%) was launched in 2006 to track the Dow Jones U.S. Select Regional Banks Index. That index includes banks that have average assets of 5% or less of the average total assets of the U.S. bank universe. Although it is market-cap weighted, no security can be more than 25% of the index. The ETF has 53 holdings and returned 16.47%, 16.40%, and 5.08% annually for the three-, five- and 10-year periods ended Feb. 6.

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