Are Regional Banking ETFs A Ticking Time Bomb

ticking-time-bomb“Robert Toll, the CEO of Toll Brothers, one of the nation’s largest luxury home builder stated that the Federal Housing Authority’s (FHA) lending practices are a definite train wreck that will raise a red flag within the next couple of months. The FHA finances homes with as little as 3.5% down. The FHA insured almost 1 of every 4 loans in 2009. 456,000, or 17%, of all FHA loans were in default as of September 2009. Independent audits show that the FHA’s reserves have fallen to $3.6 billion compared to $685 billion in outstanding loans. That’s a ratio of 0.53%, far below the 2% threshold required by congress. Keep in mind that Robert Toll is a man who has a vested interest in real estate recovery and an end to the mortgage crisis. His outlook is truly alarming for anyone who’s not prepared for another real estate related setback,” Simon Maierhofer Reports From ETF Guide.

“This, however, is not even the biggest threat. According to Sheila Bair, chairman of the Federal Deposit Insurance Corp. (FDIC), souring commercial real estate loans pose the biggest threat to the U.S. banking industry. Unpaid loans on malls, hotels, apartments and home developments reached a 16-year high in the third quarter of 2009.  These delinquencies are expected to continue rising throughout 2010 and 2011, as more than $1 trillion worth of commercial mortgages are set to renew,” Maierhofer Reports.

“This wave of upcoming, probably defaulting, mortgages poses a huge threat for regional banks (NYSEArca: KRE), which are almost four times more concentrated in commercial property loans than the big banks (NYSEArca: KBE). The fact that the FDIC is having trouble finding buyers for many of the more than 120 banks it seized in 2009, is a testament to the poor shape banks are in. Toxic mortgages were the cause of the post 2007 meltdown, as such it behooves investors to watch the developments in this sector closely. No recovery can take place until real estate prices recover. Don’t be fooled by the solid performance of real estate ETFs, such as the iShares Dow Jones US Real Estate (NYSEArca: IYR), SPDR Dow Jones REIT (NYSEArca: RWR) and others,” Maierhofer Reports.

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Here is a detailed look at the ETFs mentioned below:

The investment (KRE) seeks to replicate the total return performance, before expenses, of the KBW Regional Banking index. The fund uses a passive management strategy designed to track the total return performance of the KBW Regional Banking index. The index is a float adjusted modified-market capitalization weighted index of geographically diverse companies representing mortgage banks, loan processors, marketing and service institutions listed on U.S. stock markets. The fund is nondiversified.

TOP 10 HOLDINGS (KRE) ( 27.37% OF TOTAL ASSETS)  
 
Company Symbol % Assets
Bank Of Hawaii CP (BOH) 2.78
CVB Financial Corporation (CVBF) 2.83
East West Bancorp, Inc. (EWBC) 2.69
F N B CP (FNB) 2.72
FirstMerit Corporation (FMER) 2.58
Fulton Financial Corporation (FULT) 2.79
Hancock Holding Company (HBHC) 3
MB Financial Inc. (MBFI) 2.58
Signature Bank (SBNY) 2.65
SVB Financial Group (SIVB) 2.75

The investment (KBE) seeks to replicate the performance of the KBW Bank index. The fund uses a passive management strategy designed to track the total return performance of the Bank index. It is nondiversified.

TOP 10 HOLDINGS (KBE) ( 60.12% OF TOTAL ASSETS)  
 
Company Symbol % Assets
BK OF AMERICA CP (BAC) 8.65
BANK OF NY MELLON CP (BK) 4.42
BB&T CP (BBT) 4.28
Capital One FINANCIA (COF) 4.08
CITIGROUP INC (C) 7.74
JP Morgan Chase CO (JPM) 7.72
M&T BANK CORP (MTB) 4.56
SUNTRUST BANKS (STI) 4.14
US BANCORP (USB) 7.38
WELLS FARGO & CO NEW (WFC) 7.15

 Chart for SPDR KBW Regional Banking (KRE)
The investment (IYR) seeks investment results that correspond generally to the price and yield performance of the Dow Jones U.S. Real Estate Index. The fund generally invests at least 90% of assets in securities of the underlying index and depositary receipts representing securities of the underlying index. It may invest the remainder of assets in securities not included in its underlying index but which BGFA believes will help the fund track underlying index, and in futures contracts, options on futures contracts, options and swaps as well as cash and cash equivalents, including shares of money market funds advised by BGFA. It is nondiversified.

TOP 10 HOLDINGS (IYR) ( 42.05% OF TOTAL ASSETS)  
 
Company Symbol % Assets
ANNALY CAPITAL MANAG (NLY) 4.29
BOSTON PPTYS INC (BXP) 3.97
EQUITY RESIDENTAL (EQR) 3.77
HCP, INC. (HCP) 3.89
HOST HOTELS & RESORT (HST) 2.69
PROLOGIS SBI (PLD) 2.48
PUBLIC STG (PSA) 4.38
SIMON PPTY GRP INC (SPG) 8.69
VENTAS INC (VTR) 2.87
VORNADO REALTY TRUST (VNO) 5.02

The investment (RWR) seeks to provide investment results that, before expenses, correspond generally to the total return of the Dow Jones U.S. Select REIT index. The fund uses a passive management strategy designed to track the total return performance of the Wilshire REIT index. The subadviser seeks a correlation of 0.95 or better between the funds performance and the performance of the index. It is nondiversified.

TOP 10 HOLDINGS (RWR) ( 46.84% OF TOTAL ASSETS)  
 
Company Symbol % Assets
AVALONBAY CMTYS (AVB) 2.93
BOSTON PPTYS INC (BXP) 4.51
EQUITY RESIDENTAL (EQR) 4.24
HCP, INC. (HCP) 4.61
HEALTH CARE REIT (HCN) 2.85
HOST HOTELS & RESORT (HST) 3.23
PUBLIC STG (PSA) 5.07
SIMON PPTY GRP INC (SPG) 10.3
VENTAS INC (VTR) 3.37
VORNADO REALTY TRUST (VNO) 5.73

Chart for SPDR Dow Jones REIT (RWR)

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