A new ETF, the First Trust NASDAQ ABA Community Bank Index Fund (QABA), began trading today. This is neither a megabank ETF nor a regional bank ETF – it is a “Main Street” banking ETF.

The Investor Guide says community banks now make up 96% of all banks in the US and play an important role in our nation’s economic system. The guide goes on to say, “There has been little distinction made between the stress-tested megabanks and the nearly 8,000 community banks throughout the country. Community banks tend to be more cautious than their larger counterparts and take less risk when making lending decisions.”

The index is market-cap weighted and includes Nasdaq-listed banks and thrifts. However, the underlying index and QABA will not let just any community bank be included. To help ensure the intent and purpose of this ETF, it will exclude:

  • The 50 largest banks or thrifts and their holding companies
  • Banks or thrifts classified as having an “international specialization”
  • Banks with a “credit-card specialization”
  • Securities with a market capitalization under $200 million
  • Securities with less than $500 thousand average daily value traded (ADVT)

The fund expects to have about 100 holdings and an expense ratio of 0.60%. Additional information is available at the First Trust website. Gary Gordon, of ETF Expert, believes that QABA may be a huge hit, and I agree. First Trust has earned first-mover status for ETFs in the community banking industry.

I find this interesting because I’ve seen this sector take off like a rocket before. In more than twenty years of trading Fidelity Select funds, one of the few managers I remember is David Ellison of Fidelity Select Home Finance (FSVLX). The fund was called Fidelity Select Savings & Loan at the time. As any long term mutual fund tracker knows, David put that fund at the top of all the performance charts in the 1990s, delivering returns of more than +40% per year for an extended period. And he did it by investing in community banks, much like QABA is going to do.

By the way, David Ellison is currently the President of FBR Fund Advisors, where one of his duties is managing a similar fund, the FBR Small Cap Financial (FBRSX).

Disclosure: no positions