Make Money as These Banks Recover and Grow

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some bank stocks to your portfolio, the SPDR S&P 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 SPDR ETF's expense ratio -- its annual fee -- is a low 0.35 %. It also recently yielded about 1.9%.

Not surprisingly, given the big financial crisis of a few years ago, the ETF underperformed the world market over the past three and five years. (It's ahead of it over the past year, though.) 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.

Why banks?
If you expect the financial sector to do well over time as it recovers from the meltdown of several years ago, you might want to consider financial stocks for your portfolio. Remember, for example, how good banks are at levying fees and generating income, no matter what regulations are thrown at them.

More than a handful of banks performed strongly over the past year. Huntington Bancshares (NAS: HBAN) , for example, jumped 19%. It has been aggressively reducing its loan-loss provisions while its business has been growing, thanks to talented management. Its 2.5% dividend yield might not be tantalizing, but it was quadrupled last year, and the company does sport a lot of room to grow -- organically and via acquisitions.

New York Community Bancorp (NYS: NYCB) , up 16%, has an appealing 7.7% dividend yield and a seemingly low valuation. The company isn't expected to grow very rapidly, but it does seem to offer a sizable upside. One worry, though, is that it gets a big chunk of its net interest from refinancing-related prepayment penalties, which will likely taper off. Bears don't like its high cost of funds relative to peers, but that might be addressed by a large acquisition. In the meantime, it's been buying assets and liabilities from failed banks.

KeyCorp (NYS: KEY) gained 13%, but has seen its business loans surge, while its overall loan portfolio has been swelling -- in part due to its acquisition of 37 banks from HSBC. Bears worry about shrinking revenue , though, and while its valuation may seem attractive, the company hasn't been growing briskly and doesn't get high marks for efficiency.

Other companies didn't do as well last year, but could see their fortunes change in the coming years. First Niagara Financial (NAS: FNFG) shed about 3%, and yields 4%. It has been growing well, recently buying many branches from HSBC and inspiring some insiders to buy lots of shares in the past months. The well capitalized regional bank is busy expanding in the Northeast, and fueling that with new share issuances and a dividend reduction. (Its 4% yield is after the reduction.) This positions it for future growth, based on its bigger branch base.

The big picture
Demand for banking services isn't going away anytime soon. A well-chosen ETFcan grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

The article Make Money as These Banks Recover and Grow originally appeared on

Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, has no positions in the stocks mentioned above. The Motley Fool owns shares of Huntington Bancshares and KeyCorp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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