BNKU Stock Holdings: It’s all good news for financial stocks at the moment, with US Treasury yields continuing to rise, and investors of all stripes pivoting out of growth companies and into more conservative value plays.
Ever sensitive to increasingly high interest rates, banking institutions appear to be looking forward to the good times ahead – and one way to capitalize on these positive trends is with the BMO MicroSectors U.S. Big Banks Index 3X Leveraged ETN.
We’ll look at the pros and cons of this levered investment vehicle, and examine whether its risk-profile makes it a good fit for you and your portfolio.
What Is BNKU?
The BMO MicroSectors U.S. Big Banks Index 3X Leveraged ETN is a leveraged exchange-traded note which tracks the Solactive MicroSectors U.S. Big Banks Index.
The note is issued by the Bank of Montreal, and is intended to return 300% of its underlying index.
The fund currently has assets under management of $149 million, with 2.5 million shares outstanding. It began trading on 4/2/2019, and matures on 3/25/2039.
Is BNKU an ETF?
While exchange-traded notes (ETNs) are not exactly the same as exchange-traded funds (ETFs), exchange-traded notes such as BNKU are sometimes described as a cross between an ETF and a regular bond.
In fact, ETNs are actually a kind of bond issued by a variety of financial institutions, but, unlike most bonds, they do not come with any interest payments attached.
Similarly, ETNs are like ETFs because they are traded on public exchanges, which gives them the additional benefit of market liquidity.
BNKU Stock Holdings
BNKU tracks the underlying Solactive MicroSectors U.S. Big Banks Index, which means that the fund gives investors exposure to some of the biggest and best-known financial institutions in the United States.
There are a total of 10 index constituents that make up the portfolio, and all are weighted equally at 10%. The Solactive MicroSectors U.S. Big Banks Index is composed of the following companies:
- BANK OF AMERICA CORP
- CITIGROUP INC
- MORGAN STANLEY
- WELLS FARGO & CO
- SCHWAB (CHARLES) CORP
- TRUIST FINANCIAL CORP
- US BANCORP
- PNC FINANCIAL SERVICES GROUP
- GOLDMAN SACHS GROUP INC
- JPMORGAN CHASE & CO
Source: Unsplash
BNKU Track Record
Even with the recent market sell-off taken into account, BNKU has performed well so far in 2022. The fund is up 25% year-to-date, and could very well have been higher if not for the severe price dip which occurred in late January.
On a longer-term basis, BMO MicroSectors U.S. Big Banks Index also grew nicely during 2021, returning 116% to investors in the last twelve months.
As a leveraged fund, BNKU is set up to deliver excellent results when the market is moving in the right direction. However, when things take a turn for the worse, the losses incurred can be particularly debilitating. For instance, BNKU took a huge -80% hit at the start of the coronavirus crisis, and the fund has yet to regain its pre-COVID price as of the time of writing.
BNKU Stock Forecast
There are plenty of welcoming macro trends that should spell good times ahead for BNKU.
To begin with, US Treasury yields are rising, and stocks sensitive to interest rate rises, such as banks and other financial institutions, are poised to benefit off of the back of this.
In general, when interest rates move higher, banks see their profit margins increase. Customers and borrowers are more easily able to make their loan and debt repayments, and banks can simply charge more interest on the products that they do already offer.
Furthermore, the rotation out of growth stocks into more value-oriented companies should see an influx of new money into the financial industry as well. The tech-heavy Nasdaq has been falling lately, and investors have begun to seek shelter in cyclical and value plays instead.
As BNKU’s fortunes are tied to the performance of some of the most important banking stocks in the US, anything that is good for the financial sector is good for BNKU too.
Looking at some of the fund’s constituent stock picks individually, Bank of America is trading for close to its 52-week price high, as its consumer business soars on the success of the economic recovery as the country finally comes out of the COVID pandemic.
U.S. Bancorp’s mainly commercial business is also thriving, with its Trust and Investment Management fees increasing due in part to its acquisition of PFM Asset Management.
Meanwhile, despite Citigroup’s underwhelming recent earnings release – the bank reported a near 25% loss in its GAAP earnings per share – its net interest income is likely to rise soon, with guidance stating that for each 100 bps parallel shift in interest rates, it expects a concurrent $2.5 billion to $3 billion increase in net interest income.
On the other hand, Wells Fargo had a stellar fourth quarter, which was rewarded with a steep boost in share price, taking the firm’s stock value to levels not seen since 2018.
BNKU Expense Ratio
The net total annual fee – or expense ratio – that a BNKU fund holder pays to the issuer currently stands at 0.95%.
BNKU Risk Factors
Exchange-traded notes are not intended to be held as long-term investments, since the returns on levered funds can be difficult to predict due to problems of path dependency and compounding.
The risks that come with owning leveraged products like these are also substantial, and, as MicroSectors states in its own prospectus, should only be purchased by sophisticated investors.
One of the big issues with unsecured debt such as an ETN is that the investor can suffer a total loss if the issuing institution goes bankrupt before the maturity date. This means that there’s a kind of dual risk with an exchange-traded note:
- there’s the risk of the investment failing itself; and
- there’s the risk of default if the issuer suffers a catastrophic setback. This has historical precedent in the fall of Lehman Brothers in 2008.
In addition to this, ETNs can be called, giving them a degree of closure risk too. If the note is redeemed when the sale price is less than that when the investor bought it, the investor stands to make an overall loss on their position.
BNKU Stock Holdings, Forecast, Risks: Conclusion
BNKU offers investors a great opportunity to capitalize on the performance of America’s most high-profile finance and banking brands.
Because the fund is a leveraged product, it should only be seen as a short-term option with some serious associated risks.
But for those who believe the market conditions are right, the BMO MicroSectors U.S. Big Banks Index can deliver strong returns for courageous investors.
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