Plenty of asset classes and sectors have benefited from this year’s tumble by 10-year Treasury yields. That decline has been the catalyst behind the Utilities Select Sector SPDR (XLU) being the best of the nine sector SPDRs this year and billions of dollars of inflows to exchange traded funds holding real estate investment trusts (REITs).
REITs and utilities are just two examples of investment themes that have enjoyed declining Treasury yields. On the other side of the ledger, investors that piled into regional bank ETFs last year and held those funds into 2014 are not smiling too much. However, they have not had much reason to frown in recent weeks. [Bank ETFs Wait on Higher Interest Rates]
Buoyed by news that the U.S. economy added 288,000 jobs last month with the unemployment rate falling to a six-year low of 6.1%, the SPDR S&P Regional Banking ETF (KRE) is up 1.4% today, making it the third-best performing non-leveraged ETF in today’s short trading session.
That means KRE, the largest regional bank ETF, is up nearly 6% since the start of June. The P owerShares KBW Regional Bank Portfolio (KBWR) is up 1.6% and nearly 7% since the start of June. The leverage these ETFs offer to a strong jobs report is not surprising.
An improving U.S. economy could foster increased borrowing and financing by businesses, large and small, across the U.S. while benign mortgage rates could also provide a lift to the mortgage lending operations of regional banks. [Regional Banks Still Have Potential]
However, regional bank stocks and the relevant ETFs are often viewed as strong ideas in rising rate environments. Last year, KRE surged 48% as Treasury yields soared. ETFs such as KRE and KBWR benefit as rates rise because investors believe higher interest rates will lead to increased net interest margins for regional banks.
Earlier this year, State Street Vice President and Head of Research David Mazza told ETF Trends that “the stocks in KRE have an average beta of +0.44 to moves in the US 10 Year Treasury, meaning that KRE’s holdings have increased 0.44% on average for every 1.00% move in the 10 Year.” [Don't Forget This Leveraged ETF]
Of course, that scenario cuts both ways. With rates declining this year, investors have pulled nearly $326 million from KRE, but the bulk of those outflows, $263.5 million to be precise, were seen in the first quarter.
Factor in today’s rise and 10-year yields are up 5.5% in just the past week. It is stating the obvious, but if that trend continues the laggard status of the financial services sector would likely be erased with KRE and KBWR regaining their previous leadership roles.
SPDR S&P Regional Banking ETF
- real estate investment trusts