While outstanding earnings from large banks like Goldman Sachs (GS) and Wells Fargo (WFC) have helped big banks to make positive headlines, many investors are still justifiably wary of the financial sector. FBR Capital Markets (FBCM) and First Trust offer funds that help give exposure to smaller, and often healthier, banks.The new fund, First Trust NASDAQ ABA Community Bank Index Fund ( QABA) exposes investors to smaller, less-risky banks. Though the fund was only released July 1, it already faces competition from mutual funds such as FBR Small Cap Financial ( FBRSX) that invest in similar banks but have an established track record. In the past 24 months, investing in banks has been a risky endeavor. Although a lot of news reports are saying that the worst of the ordeal may be behind us, many investors are still hesitant to hold the same institutions that just six months ago were at the verge of breaking down. QABA is the latest instrument by First Trust, the same institution that boasts more than 30 ETFs including First Trust ISE Global Wind Energy Index Fund ( FAN) and First Trust ISE-Revere Natural Gas Index Fund ( FCG). FBRSX, as I reported on in our article on regional banks and ETFs, is managed by David Ellison, the fund manager for a number of FBR Capital Markets mutual and hedge funds. Because the aim of both funds is to follow the small-cap banking sector, their holdings consist of a number of similarly run banks and financial institutions. However, QABA with its 96 holdings may be more broadly spread across the sector than FBRSX with only 67 holdings. Investors may benefit from analyzing other aspects of the two funds before making a decision as to which one they would like to place their money in.
Like a traditional ETF, QABA is a passively managed instrument. The fund is comprised of all the Nasdaq-listed banks excluding the largest 50. Aside from this stipulation, the fund's holdings also must meet other criteria to be included in the fund. These can be found in my article on QABA's introduction. It is likely that the fund's holdings will see very few changes from year to year. FBRSX, on the other hand, is an actively managed fund. Therefore, the fund will most definitely change holdings as time goes on. In the current volatile state of the banking industry, having a manager to adjust holdings on a moment's notice may help investors avoid some of the harsh drops that could plague the sector as it attempts to rebound. Moving forward, FBRSX may be the safest choice to navigate the bumpy road that the banking industry is likely to travel. QABA may gain some ground, however, when it comes to fees. With its passive management, QABA boasts a low 0.60% fee, much lower than that of the actively managed FBRSX, for which investors will pay a hefty 1.49%. While QABA will have to prove itself in the coming months, FBRSX has seen positive returns in recent times. The return for the fund from the market bottom in March to its height in May was 37.3%. As investors attempt to wade back into the once uncertain waters of the banking industry, it may be in their best interest to start safe by investing in small, conservative banks such as the ones that make up both FBRSX and QABA. The vast majority of banks that these funds invest in are not the global conglomerates that invade the daily news with their risky subprime lending and exotic financial instruments.
Rather, these banks get back to basics. In a time when everyone is talking about the "new normal," these banks may be what the future has in mind. While QABA's methodology appears solid, the fund has yet to garner much investor attention since its launch on July 1. Investors may want to be patient or buy a limited number of shares until the volume in this fund increases. Currently the average daily trading volume for QABA is less than 5,000 shares. One ETF alternative to QABA is iShares' Dow Jones U.S. Regional Banks Index Fund ( IAT). This fund, however, tends to favor more "super regional" banks like U.S. Bancorp ( USB) and Northern Trust ( NTRS). IAT is also more top-heavy than QABA, with nearly 20% of the fund allocated to top component U.S. Bancorp. For investors who are still wary of even the safest parts of the banking industry, FBRSX, with its active management, may help investors avoid the ups and downs of a recovering sector. However, if the news is correct and the banking industry is past its low points, QABA may provide the aggression necessary for good returns while avoiding the dangers that large financial giants may bring along.