Which bank? The Australian banking industry is highly concentrated. Some would say it is an oligopoly. All the banks have made big profits and over time all of their share prices have increased considerably. People often consider them highly correlated to one another with little opportunity to pick one bank that will perform better than its peers.
Ask any Australian about the stock market and the first thing they will tell you is that the big four banks are a dominant force. They make up nearly 30% of the S&P/ASX 200 Index. So if this is the benchmark you are trying to beat, you have to invest in these financial giants.
The question becomes do you invest in all of them or do you try to pick the best performer?
The Australian banking industry is highly concentrated. Some would say it is an oligopoly. All of the banks have made big profits and over time all of their share prices have increased considerably. People often consider them highly correlated to one another with little opportunity to pick one bank that will perform better than its peers.
This bar chart depicts the 2013 returns of Australia's four major banks, illustrating that they each posted unique results.
Source: Market Vectors, FactSet, as at 31 December 2013.
The above chart shows past performance of the top four banks in MVB and MVMVBTRG. Returns represent the total return for the quarter and assume immediate reinvestment of underlying distributions and do not reflect any management costs or brokerage expenses associated with an investment in MVB. Past performance is not a reliable indicator of current or future performance, which may be lower or higher. You cannot invest directly in an index.
In 2013, the top performing bank for each quarter was:
- January to March 2013 – NAB
- April to June 2013 – ANZ
- July to September 2013 - NAB
- October to December 2013 - CBA
If you examine the entire year, you'll find that NAB was the clear winner with a 47% total return. It is a challenge for anyone to give a credible explanation for variations in these companies' results. Even more challenging would be predicting what will happen in 2014.
Picking the bank that comes last could cost you a lot of money. Fortunately there is a strategy that can help to guard against that scenario. You can use a dedicated Australian banks ETF.
Market Vectors Australian Banks ETF (ASX code: MVB) is the one and only Exchange Traded Fund (ETF) that offers investors exposure to all the Australian banks. Due to a unique cap weighting methodology, the size of each of the big banks' market value does not result in overly dominant weightings in MVB's portfolio. CBA, ANZ, WBC, and NAB are all capped at 20%, allowing the best performer to lead the pack prior to the quarterly rebalance. Given that MVB holds all the banks directly, all the dividends and franking credits pass through on a quarterly basis.
MVB could be the one you 'bank' on for your portfolio.
To find out more about MVB, please click here.
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