Bank Stock Merger Mania Might Not Happen. This ETF Explains Why.
Technology and financial advisory services by SOMKID via Adobe Stock One of my favorite things about writing for Barchart is sharing my decades of experience using exchange-traded funds (ETFs) in investment portfolios. Stock-pickers are everywhere. But as the markets continue to merge into one massive risk-on, risk-off trade, it gets tougher to identify ETFs that…
Technology and financial advisory services by SOMKID via Adobe Stock
One of my favorite things about writing for Barchart is sharing my decades of experience using exchange-traded funds (ETFs) in investment portfolios. Stock-pickers are everywhere. But as the markets continue to merge into one massive risk-on, risk-off trade, it gets tougher to identify ETFs that truly are unique enough to matter.
I can point to 100 ETFs that essentially move up and down with the broad stock market but have different names to make us think they are different. So when I do identify one I think can be useful in accentuating something going on in a stock market segment, I try to point it out here.
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That’s the case with the FT Nasdaq Aba Community Bank Fund (QABA), which I’ve come to know over its 17-year lifespan as a play on bank consolidation. It owns stocks of more than 150 community banks — the ones that are the most frequent targets of the big money center and regional banks when they are on the hunt for acquisitions.
If you have been around as long as I have, you have seen several bank cycles — the consolidation into fewer companies, followed by a frustration with too much “bigness,” which leads to more entrepreneurial community banks popping up to fill the void. Sometimes, they’re started by the same executives who sold out to the big guys a few years earlier and have allowed their non-compete agreements to expire.
More recently, bank equities staged a nice recovery following the historic banking distress of 2023. That’s when, for a short time, it appeared many smaller banks were going to go bust. The rumors were worse than the news. That time, at least.
However, the technical pattern I see in QABA tells me that the relief rally has likely run its course. The culprits include margin pressure due to high deposit costs, sluggish loan demand, and ongoing exposure to commercial real estate (CRE) maturities.
You see, a bank’s profitability relies heavily on its net interest margin (NIM). That’s the difference between the interest it earns on assets (loans and securities) and the interest it pays to depositors.
And smaller banks face specific headwinds that cap operational expansion. Depositors continue to move cash out of low-yielding checking accounts into higher-yielding money market funds and Treasurys, forcing regional banks to pay higher interest rates to retain deposits. These banks also tend to hold a lot of commercial office and retail mortgages. As these loans mature and require refinancing at higher interest rates, regional banks face loan loss provisions and asset write-downs. Furthermore, elevated borrowing costs have reduced consumer and commercial loan demand, limiting new interest-earning asset creation.
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As for QABA itself, it is a small ETF that owns smaller-cap bank stocks. That’s intriguing to me for the long term, as anything not in the S&P 500 Index ($SPX) is bound to be more immune to broad market selloffs. It doesn’t hurt that QABA’s portfolio sells at 12x trailing earnings either.
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The holdings roster is only modestly concentrated at the top. That’s because in this business, there are no hyperscalers. They each operate in their own communities.
What Else Should QABA Investors Consider?
Any unexpected reduction in regional bank capital reserve mandates or regulatory compliance requirements could lower operating costs and spur a secondary equity rally. A sharp steepening of the yield curve, where long-term lending rates rise faster than short-term deposit costs, would expand NIM and reinvigorate bank earnings.
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For me, the bottom line is always the chart. Shown above, I see QABA as stretched and perhaps ready to fade off from that 50% up move since spring of 2025. However, this is one I always have on the watchlist, given how unique it is.
Rob Isbitts is a semi-retired CIO, former fiduciary investment advisor, and Barchart columnist. Check out his other work at ETFYourself.com (featuring the Fresh Charts weekly trading post), and ROAR.PiTrade.com, helping investors to better-manage their own portfolios.
On the date of publication, Rob Isbitts did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
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