Regional banks have been leading the financial sector higher for
much of 2013. This space has been a strong player as worries over
global growth rose, and investors wanted to focus on the U.S.
market for exposure.
Beyond this, regional banks have also been prime beneficiaries from
a widening spread between long and short term rates. This has
largely been due to expectations of QE tapering which could boost
yields on longer dated securities while keeping the short end of
the curve subdued (see
Time to Bank on Regional Bank ETFs?
While many investors thought that the QE taper would begin in the
September meeting, Bernanke and company squashed this idea,
choosing instead to keep the $85 billion in monthly QE intact. This
led to a big immediate decline in rates, and it helped push down
expectations for mid-term Treasury debt as well.
In fact, five year government debt, which was trading around the
1.85% level as late as the fifth of September, has been on a steady
decline lately. These notes then plunged from 1.62% to 1.43%
immediately following the announcement, before settling just under
the 1.50% mark in the first full day after the 'no taper' release
3 ETF Winners from the No Taper Shocker
This decline in medium-term debt levels and rising expectations
that we may see either a modest taper at the next Fed meeting, or
even another 'no taper' announcement, left expectations of a
compressed spread pretty high.
Impact and How to Play Going Forward
The combination of this decline in rates along with muted
expectations for future tapering had a pretty negative impact on
regional bank ETFs in Thursday trading, pushing them down more than
the overall market in the time frame. The sluggish trading lately
may also be causing investors to question more purchases in this
once-soaring space, especially given recent events.
However, the taper is still going to come eventually, and rates
have actually already regained some of their momentum. So while
rates may be still off of their recent highs, it is pretty
reasonable to expect them to rise back to previous levels in the
And when the Fed does inevitably taper, the spread will once again
widen, making a regional bank investment a pretty solid play. For
this reason, investors looking out at least a few months might
consider the recent slump in the space as a decent buying
opportunity, and a great way to get in ahead of the eventual taper
in a positive way.
While investors can certainly buy up any regional bank stock out in
the market, an ETF approach may also be a sound idea. This
technique allows investors to play the broad trends in the space
without worrying about company specific issues, potentially
lowering risk in the process.
For investors intrigued by this idea, we have highlighted some
regional bank ETFs below. Any of these could be interesting choices
to get in on the solid trend in this corner of the market and buy
some well-positioned companies on the dip.
SPDR S&P Regional Banking ETF (
This is the most popular regional banking ETF on the market, with
over $2 billion in assets under management. The fund saw extreme
volume of about 11.2 million shares-compared to an average of about
2.3 million-for Thursday's session, in which it slumped by 1.8%.
The ETF holds about 80 stocks in its basket, focusing on small and
mid caps for the majority of its exposure. The fund does use an
equal weight methodology, so concentration issues are minimal; no
single company makes up more than 2.2% of the total assets.
From a longer term performance perspective, KRE has added about
12.4% in the past six months, while its five day return comes in at
the Top Ranked ETFs here
iShares U.S. Regional Bank ETF (
Another option for investors seeking regional bank exposure is this
iShares fund which has just over half a billion in assets. It also
saw a big volume day in Thursday trading, while it lost about 1.5%
for the session.
Unlike KRE, this product takes a cap weighted approach so its
roughly 60 stock portfolio is quite concentrated in large cap
companies. In fact,
combine to make up nearly 30% of the total assets in this ETF.
For this fund's performance, the past five days haven't been too
bad as it has added about 0.2%, while the trailing six months have
seen a gain of 12.1%.
PowerShares KBW Regional Banking Portfolio (
An often overlooked option in the regional banking ETF world is the
cheap choice of KBWR. This product has under $40 million in assets
under management, but can be more volatile, having lost about 2.2%
in the rocky Thursday session.
The ETF holds just 50 stocks in its basket, putting the vast
majority of the assets into small caps-another reason for the
volatile nature of this fund. It does do a great job from a
concentration perspective though, as no single firm makes up more
than 3.5% of assets (also see
A Steeper Yield Curve Makes These ETFs Winners
In terms of performance, KBWR has lagged as it has added 11.9% in
the past six months, while its five day return stands at -0.5%.
Regional bank ETFs were extremely strong picks in the beginning of
the year, and rose more than the overall market when tapering
seemed imminent. They were poised to benefit from a wider spread,
and making more off of higher loan rates, thereby increasing
However, the shock move by Bernanke to not taper at all pushed
these securities lower, and called into question the investment
case for these companies. We believe that this may have created an
interesting buying opportunity, as the taper has to come
eventually, suggesting a play for the slumping regional banking
ETFs could be a great idea for those with a reasonable time
horizon, and a belief in an eventual taper of QE.
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ISHARS-US RG BK (IAT): ETF Research Reports
PWRSH-KBW RBP (KBWR): ETF Research Reports
SPDR-KBW REG BK (KRE): ETF Research Reports
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US BANCORP (USB): Free Stock Analysis Report
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