Be Cautious with (QABA), (KRE), and (IAT) ETFs

Investors need to be extremely cautious when considering investing in ETFs such as First Trust Nasdaq ABA Community Bank Index Fund (Nasdaq:QABA), SPDR KBW Regional Bank Industry ETF (NYSE:KRE), and the iShares Dow Jones US Regional Banks Index Fund (NYSE:IAT), as they include regional banks that could be failing.

There's some good news in the Federal Deposit Insurance Corp.'s latest quarterly report. The banking industry had a profitable year in 2010, its first since 2007. The FDIC expects fewer banks to fail this year than last. The amount banks set aside last quarter for bad loans declined 50% year over year. The deficit -- yes, deficit -- in the FDIC's deposit insurance fund improved to $7.4 billion exiting December from $8 billion exiting September.

The bad news? Last year, the FDIC shut down 157 banks, an 18-year high. The FDIC's list of "problem" banks -- at risk of failing -- grew during the fourth quarter, to a whopping 884 from 860. That's nearly 12% of U.S. banks. About 21% of banks remain unprofitable.

Oh, and a primary reason profits improved in 2010 was because less money was set aside for bad loans. Well, duh. Upcoming regulations like debit interchange fee ceilings have the potential to hurt profit-rich fees. Loan demand is weak. Insisting borrowers actually be creditworthy is also limiting new loans. Even though the steep yield curve creates a great profit environment for banks, profits are still pretty wimpy.

Small and midsized banks are particularly risky. The FDIC doesn't disclose which banks are on its problem list, but its failed bank list is full of community banks

First Trust Nasdaq ABA Community Bank Index Fund closed Monday at $24.51, down $0.32, or 1.28 percent. SPDR KBW Regional Bank Industry ETF closed at $25.95, down $0.22, or 0.84 percent. iShares Dow Jones US Regional Banks Index Fund (NYSE:IAT) closed down at $24.42, losing $0.25, or 1.02 percent.




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