The sector has been adjusting for a long time; what are the investment opportunities in bank ETFs?

Source: International Financial News

Author: Xia Yuechao

Recently, the market has been volatile, and low-valuation sectors represented by banks have shown strong “resilience” against declines.

Wind data shows that as of March 18, over the past week, several bank ETFs (Exchange-Traded Funds) have ranked among the top in terms of gains within the stock ETF category. Although there was a pullback today, many bank ETFs had previously experienced a “six consecutive days of gains” trend, highlighting their defensive qualities and attracting market attention once again.

Since the third quarter of last year, the banking sector has been under pressure overall, but some bank stocks have recently led a rebound. Respondents believe that ongoing geopolitical conflicts and declining market risk appetite have led investors to seek low-risk assets with more certainty. Dividend-paying assets like banks are currently undervalued and are expected to continue attracting long-term capital inflows.

Bank ETF Rebound

During stock market fluctuations, undervalued assets perform notably better.

For example, in public stock ETFs, Wind data shows that as of March 18, over the past week, the Shanghai-Hong Kong-Shenzhen Consumer Leading ETF rose 4.18%, ranking first among similar funds. More than ten bank ETFs followed, with the best-performing one gaining 2.22% in the period. Food & Beverage ETFs, Logistics ETFs, and Innovation Drug-related ETFs also performed well. In contrast, previously high-performing thematic ETFs such as Nonferrous Metals, Power Grid, Gold, and Chemicals experienced significant pullbacks during the same period.

Notably, several bank ETFs experienced a “six-day consecutive rise” rebound from March 10 to March 17. Although there was a slight correction on March 18, bank ETFs remained one of the better-performing stock ETF categories over the past week.

Looking at a longer timeframe, bank-related ETFs have been in a prolonged consolidation since reaching a high point on July 10 last year. As of March 18 this year, the maximum drawdown exceeded 16%, diverging significantly from the broader market—while the CSI 300 Index increased by 16.7%.

In terms of net inflows, bank ETFs seem to be somewhat forgotten by funds. Since peaking on July 10 last year, the largest net inflow among all bank ETFs was only 720 million yuan, with some products even experiencing net outflows.

In stark contrast, more than ten ETFs had net inflows exceeding 10 billion yuan during the same period, with hundreds of ETFs seeing inflows over 1 billion yuan. The top inflow ETFs mainly focus on hot themes such as power grid equipment, securities, chemicals, nonferrous metals, satellites, and broad-based indices like the CSI A500.

Dividend Value + Defensive Attributes

In the current structural market environment, growth assets are generally more favored by capital, while defensive sectors like banks receive less attention. However, recent significant market volatility has prompted some funds to reassess low-risk assets.

Regarding the ongoing adjustment of the banking sector since Q3 last year, Feng Chengcheng, a fund manager at Huabao Fund, said the sector has been under continuous capital pressure. Overall, some broad-based ETFs have experienced net redemptions, putting pressure on high-weighted bank stocks within related ETFs.

Feng Chengcheng noted that since the end of January this year, some high-growth stocks within the banking sector have led an upward trend, prompting more stocks to rebound. “Since February, the banking sector’s performance has shown an inverse relationship with sectors like nonferrous metals and telecommunications, which had previously seen larger gains.”

Therefore, Feng Chengcheng believes that the previous adjustment in the banking sector has been quite sufficient. From fundamental certainty, earnings stability, dividend value, and defensive qualities, the sector now has positive factors that could trigger a rally.

“Next, we expect more funds, especially long-term allocation funds, to consider investing in banking and dividend-oriented ETFs.” Zoupai Wealth Public Fund Product Operations Zeng Fangfang analyzed that the logic is mainly based on the following points: “First, risk aversion and allocation demand are rising. In an environment of increasing global uncertainty and declining interest rates, high-dividend assets with bond-like qualities and cost-effectiveness are more attractive to insurance funds, pensions, and other long-term capital. Second, there is huge potential for incremental funds, as many bank deposits mature and institutional investors like insurance funds have substantial capital to allocate, making these ETFs highly suitable for their long-term stability needs. Third, valuation advantages: defensive sectors are currently undervalued historically, and increased market volatility or high valuations of growth stocks will attract various funds, including those that missed earlier opportunities, to flow back.”

Fangfang Zeng believes that the current rationale for allocating to bank ETFs is based on the sector’s low valuation, ongoing policy support, and the influx of long-term funds. The banking industry’s fundamentals are improving positively, and the sector not only offers high defensive value but also has potential for valuation recovery amid a moderate economic rebound.

Feng Chengcheng stated that the prolonged US-Iran conflict has exceeded expectations, leading to a decline in market risk appetite, which forces investors to seek more certain assets. In this context, risk-resistant assets like banks—characterized by earnings recovery and high dividends—are expected to become attractive allocation options.

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