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Motley Fool: Banking on it

U.S. Bancorp’s superior asset quality should help keep its pandemic-related losses relatively low.  (Associated Press)
U.S. Bancorp’s superior asset quality should help keep its pandemic-related losses relatively low. (Associated Press)

When it comes to the big banks, U.S. Bancorp (NYSE: USB) is a best-in-breed standout. Over the past decade, the seventh-largest U.S. bank (by assets) has consistently produced the best return on equity, or ROE, and return on assets, or ROA, among its peer group, and it has done a great job of lending responsibly and avoiding risky assets. What’s more, it has consistently run one of the most efficient operations in the branch-based banking industry.

The caveat is that investors have had to pay a premium for this quality. For much of the past decade, while it was producing stellar profitability, U.S. Bancorp was also trading for close to double its book value.

However, the COVID-19 pandemic has hit bank stocks hard, and U.S. Bancorp was hit worse than most. The main reason is that banks are bracing for an expected wave of defaults caused by elevated unemployment. That’s a common worry across the sector, but unlike many of its major peers, U.S. Bancorp has no substantial investment banking operations – which tend to do better in turbulent economic times. Even so, U.S. Bancorp’s superior asset quality should help keep its losses relatively low, so now could be a rare opportunity to add U.S. Bancorp to your portfolio at a big discount. As a hefty bonus, the stock’s dividend recently yielded over 4.8%.

Ask the Fool

Q. I’m saving to buy a house in a few years. How should I invest that money? –P.W., Carmel, Indiana

A. Not in stocks, unfortunately. The stock market is arguably the best way to grow your wealth over the long run, but in the short run, anything can happen – such as a market crash at an inconvenient time, forcing you to postpone your purchase.

Park short-term savings – money you’ll need within five years (or even 10 years, to be more conservative) – in safer places, such as bank accounts, certificates of deposit, known as CDs, or money market accounts. You can find good rates for such accounts at our sister site, TheAscent.com.

Q. What, exactly, are “tech stocks?” – H.G., Santa Fe, New Mexico

A. When many people hear the term “tech stocks,” they probably imagine companies such as computer hardware manufacturers, semiconductor specialists and software companies. But these days, many, if not most, companies employ a lot of technology in their operations.

Airlines, for example, rely on technically complex machines and employ fancy software to manage their logistics. Banks may seem like old-fashioned businesses, but there’s a lot of technology behind the scenes, as millions of transactions are processed electronically and consumers are shifting to banking online. Even Nike has recently introduced technology (“Nike Fit”) that measures your foot electronically and recommends the correct shoe size for you – in its stores or via an app. Some companies are even 3D-printing shoes.

The energy industry uses technology to produce solar power and search for oil, among other things. Retailers use technology to track their inventory and remain stocked. Some are even using robots in warehouses. As you can see, “tech stocks” isn’t a particularly distinctive term anymore.

My dumbest investment

My dumbest investment was trusting my old financial adviser’s recommendation of mutual funds that charged load fees. I learned my lesson, though, and now I stick with no-load mutual funds and exchange-traded funds. I buy and hold, follow the market and keep learning at Fool.com. – P.F.D., online

The Fool responds: Mutual funds that charge load fees are bad for investors: A 5% front-end load, for example, will shave 5% off your investment from the get-go. Also, those fees are often part of a fee-sharing arrangement in which a financial adviser gets you to invest in a certain fund and then collects a commission from the mutual fund company for doing so. That’s a conflict of interest.

It’s good to understand the concept of fiduciary responsibility: An adviser held to a fiduciary standard must put your interests first and find the investments that will serve you best. Advisers who are not so bound only have to recommend suitable investments – some or all of which might reward them with commissions. (Not sure if your adviser is bound by fiduciary duty? Ask!)

The good news is that there are lots of no-load funds – the vast majority of mutual-fund dollars, in fact, are invested in no-load funds. So focus your attention on funds with no loads, and aim to minimize other annual fees you pay. (A fund’s annual fees are typically grouped together as its “expense ratio.”)

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