The Backbone of America: Why This Bank ETF Is a Must-Watch for Value Investors

Despite the technological innovation seen in the U.S. and around the world, the banking system remains one of the most essential lubricants of the economic engine.

Banks don't just take deposits, though that is one of the industry's important functions. These institutions extend the credit needed for companies to expand and for people to buy houses. Financial institutions support the vibrant functioning of capital markets, and banks backstop vital consumer needs, such as auto loans and credit cards.

This bank ETF offers value and the potential for rising dividends. Image source: Getty Images.

Accounting for all of that, perhaps it's not surprising that financial services is the second-largest sector in the S&P 500. Investors can access financial stocks broadly via an array of exchange-traded funds (ETFs), including the Invesco KBW Bank ETF (NASDAQ: KBWB). In fact, this ETF has the industry focus (and other positives) that bank investors may be seeking.

With financial ETFs, details matter

Investors seeking exposure to a basket of bank stocks need to examine the differences among the ETFs that track them. For example, the State Street Financial Select Sector SPDR ETF isn't a bank ETF. Instead, it represents the financial services stocks found in the S&P 500, meaning it includes credit card network operators, index providers, and insurance carriers, among other non-bank entities.

Conversely, the Invesco bank ETF, which is the third-largest financial services ETF of any stripe, focuses solely on bank equities. Although this $6.1 billion ETF holds just 25 stocks, it features an admirable mix of investment, large-scale money-center, and regional banks.

Among the Invesco ETFs' top 10 holdings, investors will find Goldman Sachs and Morgan Stanley, meaning the fund has leverage to what's happening on Wall Street, including possible upticks in initial public offering (IPO) and merger and acquisition activity.

Those exposures don't mean this ETF is all about the "Wall Street elite." Extensive exposure to regional banks underscores the fund's Main Street feel. More important than those vibes is the fact that regional banks are considered prime value destinations among banking stocks. That includes US Bancorp, Huntington Bancshares, and Western Alliance Bancorp, all of which are members of this ETF's portfolio.

This ETF has dividend growth potential

Seasoned investors know that, before the global financial crisis, it was tough to beat bank stocks for reliable dividend growth. However, that calamity led to a spate of payout suspensions that dramatically altered the banking industry's dividend complexion.

More than a decade removed from the crisis, bank dividends are on the mend as the most prominent U.S. financial institutions consistently pass the Federal Reserve's annual stress tests. Last year, multiple members of the Invesco KBW Bank ETF lineup, including most of the top 10 holdings, received the green light to boost shareholder rewards programs.

The fund's trailing-12-month distribution rate of 2.01% implies ample room for long-term payout growth, which banks could use to attract more investors. This ETF's annual expense ratio is 0.35%, or $35 on a $10,000 investment.

Todd Shriber has positions in Select Sector SPDR Trust-State Street Financial Select Sector SPDR ETF. The Motley Fool has positions in and recommends Goldman Sachs Group and U.S. Bancorp. The Motley Fool recommends Western Alliance Bancorporation. The Motley Fool has a disclosure policy.