Directional Sign with Loss Profit Words — porcorex

Two of the worst-performing areas of the US stock market in the past 18 months have been regional banks and the REIT space. Small-cap value writ large has underperformed the S&P 500 with the high-dividend-yield factor providing lackluster returns despite strength in the underlying economy.

But has the relative weakness been too great? I assert that with today’s very low valuations and some technical improvement, the Invesco KBW High Dividend Yield Financial ETF (NASDAQ:KBWD) is now worthy of an upgrade from a sell to a hold.

Since I last analyzed the small ETF, shares are down 7% price only with a 13% total return since November 2022. Contrast that with a 38% total return in the S&P 500.

Regional Banks and REITs Sharply Losing Ground to the S&P 500

1-Year Factor Performances: Small Cap & High Dividend Weakness

According to the issuer, KBWD invests in companies principally engaged in the business of providing financial services and products, as determined by the Index provider. The Fund and the Index are rebalanced and reconstituted quarterly.

KBWD is a small ETF with just $372 million in assets under management as of June 24, 2024. I remain wary of the ETF’s very high 2.0% annual expense ratio, so I assert that using this fund as a tactical play on a rebound in the small-cap Financials and Real Estate sector is prudent rather than owning it for the long haul. KBWD currently yields 12% on a trailing 12-month basis but its share-price momentum ETF Grade by Seeking Alpha is very poor at a D-.

KBWD is also considered a risky portfolio given its high annual standard deviation history, elevated turnover rate, and above-average tracking error. The only strong point is the fund’s liquidity rating since the average daily volume is more than 120,000 shares while its 30-day median bid/ask spread is seven basis points – I would still encourage investors to use limit orders during the trading day.

Looking closer at the portfolio, the 1-star, Negative-rated ETF by Morningstar is almost entirely invested in the small-cap value. Thus, there is high cyclical exposure to macro risks, including the primary threat of higher interest rates ahead. Of course, if yields drop, KBWD should benefit. Now with a price-to-earnings ratio under 8 and a long-term EPS growth rate of close to 10%, the PEG ratio under 1 appears somewhat attractive despite its low-quality portfolio.

KBWD: Portfolio & Factor Profiles

KBWD is concentrated in the sense that the ETF is invested in just two sectors. Financials is the largest weight at 58% and Real Estate is the remaining 42%. So, the fund is a targeted play and should not be considered a diversified approach. While no single stock is more than 4.2% of the portfolio, many of the equities correlate in price action.

KBWD: Holdings & Dividend Information

Seasonally, June and July tend to be decent months for this expensive factor ETF, but volatility has historically been apparent in August and September, so there is a very near-term seasonal tailwind at play.

KBWD: Bullish June-July Trends, Weak August-September Seasonality

The Technical Take

I’m hesitant to upgrade this high-cost ETF to a hold, but the technicals suggest the downtrend has largely ended. Notice in the chart below that shares now have key support in the $13 to $14 range. While a declining resistance line remains in play, the flattening of the fund’s long-term 200-day moving average is an encouraging sign from a momentum point of view.

I’d like to see KBWD rally through $16 on high volume to help confirm a bullish reversal pattern. A breakdown under $14.50 would likely lead to a test of the $13 low from last October. Also, take a look at the RSI momentum oscillator at the top of the graph – like the price, it is consolidating, so that could be a first look at what might unfold with a price. Finally, with a high amount of volume by price in the $13.50 to $16.50 zone, this current trading range may continue to frustrate both the bulls and the bears.

Overall, with a sideways chart in the past 18 months, KBWD is a relative laggard, but its downtrend has flattened out.

KBWD: Price and RSI Momentum Consolidating

The Bottom Line

I am upgrading KBWD from a sell to a hold. Its low valuation and improved technicals are encouraging for active investors, but I do not advise holding a long-term position due to its elevated expense ratio.