2023-07-20 16:27:28 ET
Summary
- The iShares U.S. Regional Banks ETF has been initiated with a buy rating due to its low valuation and improved technical trends.
- The fund, which has less than $1 billion in assets under management, holds 35 securities and pays a high 3.7% dividend yield.
- Despite a 74% allocation to domestic small and mid-cap stocks, the fund has shown resilience in recent months, outperforming the S&P 500 for nearly three months.
- With a very cheap valuation, high yield, and a high-volume technical breakout, I see bullish upside for both short-term and long-term investors.
Regional banks was a popular niche throughout last year’s value-led equity market rally. The bearish hammer was dropped this past Q1 following the sagas of Silvergate Capital, Silicon Valley Bank, and Signature Bank. New lows were then notched in early May as renewed fears emerged in the industry. But times are better it appears. A higher low was marked during a brief June dip, and today, IAT has climbed to a fresh 4-month high, outperforming the S&P 500 for nearly 3 months now. I believe more upside is to come.
Thus, I am initiating a buy rating on the iShares U.S. Regional Banks ETF (IAT).
Cheap Regional Bank With Big Relative Strength
According to the issuer, IAT seeks to track the investment results of an index composed of U.S. equities in the regional banks sector, generally small and mid-sized domestic banks. IAT can be used to make a bet on the often risk-on U.S. banking industry, but you must be mindful of the risks . Some good news was reported in early June as insiders were seen scooping up regional-bank stock shares.
IAT has less than $1 billion in assets under management and it pays a high 3.7% dividend yield, as of July 19, 2023. The fund holds 35 securities, so it is a somewhat concentrated portfolio with the top three positions (PNC Financial Services (PNC), U.S. Bancorp (USB), and Truist Financial (TFC) comprising more than 35% of the allocation.
So, paying close attention to fundamentals and price action among those three super-regionals is key. But with a 30-day median bid/ask spread of just three basis points and with a 30-day average volume north of half a million shares, tradeability appears decent in my opinion. Its 0.39% annual expense ratio is moderate, too.
Digging deeper into IAT’s portfolio, notice in the Morningstar Style Box below that the fund is heavily value-oriented. Moreover, there’s a further cyclical risk given its large 74% allocation to domestic small and mid-cap stocks. Thus, an economic downturn could hurt IAT more than other more growth-focused, defensive, or broad-based ETFs. But with a price-to-earnings ratio under 8, there is some value to be found here. iShares lists the current price-to-book multiple, a key valuation gauge for banks, at just 1.09.
IAT: Portfolio & Factor Profiles
With a low valuation, high yield, strong liquidity, and focused exposure, I want prospective investors to understand that IAT is not just the small regionals. There is actually diversified bank exposure, and that includes "super regionals" that command a significant portion of the ETF.
IAT: Significant Diversified Bank Industry Exposure Thanks To Cap Weighting Scheme (June 30, 2023)
Seasonally, IAT tends to rally steadily from late August through year-end, according to data from Equity Clock . As the broad market is to face Q3 volatility, historical data suggests that IAT has proven to offer some outperformance, making it a favorable choice for overweighting in the coming months if the trend continues in my view.
IAT: Bullish Season Trends Late August Through Year-End
The Technical Take
IAT has been resilient in the past few months. Notice in the chart below that shares have just now rallied through key resistance that had been seen in the $35 to $37 range. This week’s high-volume breakout comes as regional banks’ earnings roll in is particularly encouraging to me. Also, take a look at the RSI momentum indicator at the top of the chart. Momentum has been improving at a rapid pace since March.
Helping to confirm the May bottom was a bullish RSI divergence. Coupled with the recent volume spike, there are strong signs that more gains are on the horizon. Standing in front of the bulls, though, is a clear spot of polarity on the chart. $45 to $47 is a key spot, and before that horizontal line, the falling 200-day moving average line could bring about some profit-taking from dip-buyers in the low $40s.
The good news is that there is not much volume of shares traded from here (near $38) to $45 and there is ample volume by price acting as potential support from $32 to $36.
IAT: Bullish Inverse Head and Shoulders Bottom & Breakout, Strong RSI Momentum Trend, $46 Resistance
The Bottom Line
I have a buy rating in IAT for its low valuation and improved technical trends.
For further details see:
IAT: Regional Banks Breakout, Shares Very Cheap