Community bank ETF signals acquisition rally may be stalling
The FT Nasdaq ABA Community Bank Fund (QABA) has gained 50% since spring 2025, but Rob Isbitts, a semi-retired chief investment officer, former fiduciary investment advisor, and Barchart columnist, wrote this week that the rally has likely run its course. QABA is a 17-year-old exchange-traded fund that holds more than 150 community bank stocks outside the S&P 500 Index.
Key takeaways
- The FT Nasdaq ABA Community Bank Fund (QABA) has gained 50% since spring 2025, but columnist Rob Isbitts wrote this week that the rally has likely run its course.
- QABA is a 17-year-old ETF holding more than 150 community bank stocks outside the S&P 500, trading at 12 times trailing earnings.
- Isbitts cited pressure on net interest margin as the main headwind, as depositors shift cash to money market funds and Treasurys, forcing smaller banks to raise deposit rates.
- Maturing commercial office and retail mortgages requiring refinancing at higher rates raise the prospect of loan loss provisions and asset write-downs, while reduced loan demand limits new interest-earning assets.
- Isbitts identified two possible catalysts to revive the trade: an easing of capital reserve or regulatory compliance requirements, or a sharp steepening of the yield curve.
The FT Nasdaq ABA Community Bank Fund (QABA) has gained 50% since spring 2025, but Rob Isbitts, a semi-retired chief investment officer, former fiduciary investment advisor, and Barchart columnist, wrote this week that the rally has likely run its course. QABA is a 17-year-old exchange-traded fund that holds more than 150 community bank stocks outside the S&P 500 Index.
Isbitts framed the fund as one of the few ETFs he considers genuinely distinct from the broad market. He noted in his column that identifying such funds has become more difficult as markets have converged into what he called a single risk-on, risk-off trade.
The headwinds he cited center on net interest margin, the difference between what banks earn on loans and securities and what they pay depositors. Depositors have been moving cash out of low-yielding checking accounts into money market funds and Treasurys, forcing smaller banks to raise deposit rates to hold those balances. Commercial office and retail mortgages on those balance sheets are coming due and requiring refinancing at higher rates, which raises the prospect of loan loss provisions and asset write-downs, Isbitts wrote. Reduced consumer and commercial loan demand has meanwhile limited new interest-earning asset creation.
The portfolio trades at 12 times trailing earnings, according to his column. Holdings are modestly concentrated at the top, a natural consequence of a business where, as Isbitts noted, there are no hyperscalers; each bank operates within its own community.
Community banks have long been the primary acquisition targets when money center and regional banks are on the hunt for growth. That cycle, and the new-bank formation that follows as executives clear non-compete agreements and rebuild, has driven periodic consolidation waves throughout QABA's 17-year history. Banking equities staged a recovery after the distress period of 2023, when concerns about smaller lenders briefly escalated before the situation stabilized.
Two possible catalysts could revive the trade. An unexpected easing of capital reserve or regulatory compliance requirements could lower operating costs and prompt a secondary equity rally, Isbitts wrote. A sharp steepening of the yield curve, where long-term lending rates rise faster than short-term deposit costs, would expand net interest margin and reinvigorate bank earnings.
Isbitts said he keeps QABA on his watchlist given what he described as its unique positioning among small-cap bank funds, but he views the chart as stretched after the 50% advance.