Make Money in Recovering Bank Stocks the Easy Way

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Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the banking industry to thrive over the long run as companies improve their credit quality and find ways to remain profitable amid new regulations, the SPDR KBW Bank ETF (NYS: KBE) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The banking ETF's expense ratio -- its annual fee -- is a relatively low 0.35%.

This ETF has performed poorly over the past five years, due largely to the credit crisis and recession. But healthy beaten-down banks are likely to spring back to life. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

With a low turnover rate of 16%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.

What's in it?
Few of this ETF's components had strong returns over the past year. US Bancorp (NYS: USB) gained just 1% over the past year, but that's great, compared to the ETF, which sank 23%. The company has been posting growing revenue and strong profit growth. It has a solid reputation and remained profitable during the financial crisis, paying back its TARP money quickly.

BB&T (NYS: BBT) , down just 4%, is among the group of regional banks with attractive loan portfolios. Its bad loans as a percentage of total loans figure was recently 1.9%. That's in the same neighborhood as Fifth Third Bancorp (NAS: FITB) , at 2.2%, and Huntington Bancshares (NAS: HBAN) , at 1.4%, and considerably lower than Regions Financial (NYS: RF) , at 3.8%.

Other companies didn't add as much to the ETF's returns last year, but could have an effect in the years to come. Hudson City Bancorp (NAS: HCBK) , down 50%, has been whacked by the low-interest rate environment and its impact on interest income. But it has been improving its credit quality, and interest rates will inevitably rise... eventually.

The big picture
Demand for banking services isn't going away anytime soon, and the public's growing disdain for big banks bodes well for smaller ones (and credit unions). A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

Learn aboutthe best dividend ETFs. And if you're looking for some great investments beyond ETFs, consider these10 Stocks for Your Retirement Portfolio.

At the time this article was published Longtime Fool contributorSelena Maranjianholds no position in any company mentioned.Click hereto see her holdings and a short bio. The Motley Fool owns shares of Huntington Bancshares and Fifth Third Bancorp. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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