Not Believing Yellen, Regional Bank ETF Pops
Still not fully satisfied with the state of the U.S. economic recovery, Federal Reserve Chair Janet Yellen Wednesday assuaged skittish investors that short-term interest rates will remain near zero for a “considerable time.”
Various corners of the financial markets see things differently. For example, 10-year Treasury yields are up 1.2% today, perhaps an indication that some market participants are factoring in a surprise rate hike in the coming months.
A more overt signal regarding some investors’ views on the U.S. interest rate outlook comes by way of rate-sensitive regional bank stocks and exchange traded funds. The SPDR S&P Regional Banking ETF (KRE) , the largest dedicated regional bank ETF by assets, is higher by 2.1% today on volume that already looks poised to eclipse the daily average. [Regional Bank ETFs Still Have Upside]
Although KRE is one of the top-performing non-leveraged ETFs to this point in Thursday’s session, the ETF’s bullishness is not merely a one-day phenomenon. Amid a rebound in bank stocks and ETFs, KRE is now up more than 4% over the past month.
In another sign of not only the legitimacy of the financial services sector rebound but also investors’ interest rate expectations, KRE is the ninth-best non-leveraged ETF over the past month and half of the ETFs that have topped over that period are financial services funds. [Goldman Boosts Broker-Dealers ETFs]
Those familiar with KRE, the largest regional bank ETF, know the ETF’s utility and sensitivity to interest rates. After last year’s 47.5% surge, KRE has been experiencing that sensitivity to interest rates this year as 10-year Treasury yields have tumbled. KRE applies an equal-weight methodology to its 80 holdings, meaning the ETF is not dominated by just a few bank stocks as so many financial services are
Evidence suggests investors are again warming to financial services ETFs and are doing so in significant fashion. Over the past month, $854.3 million in new assets has flowed into the Financial Select Sector SPDR (XLF) . In just the past week, investors have allocated nearly $126 million in new money to KRE.
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. ETFs such as KRE benefit as rates rise because investors believe higher interest rates will lead to increased net interest margins for regional banks. [Rising Rates Plays Rise Again]
SPDR S&P Regional Banking ETF
ETF Trends editorial team contributed to this post.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
