Regional Bank ETFs Still Showing Promise as Rates Rise

ETF Trends

For a good portion of 2013, financial servicesE TFs have been leaders among sector funds. That much is proven by an almost 23% year-to-date gain for the Financial Select Sector SPDR (XLF) . Year-to-date inflows to XLF of nearly $3.8 billion make XLF the top asset-gathering sector ETF.

Regional bank ETFs have been even better. Funds with exposure to regional banks have actually benefited from rising interest rates because investors believe higher interest rates will lead to increased net interest margin for regional banks. Improved U.S. economic data, including generally robust housing data, has also aided ETFs like the SPDR S&P Regional Bank (KRE) . KRE has climbed 28.1% this year. [Regional Bank ETFs in Focus as Rates Rise]

Another bank ETF to consider is the PowerShares KBW Bank Portfolio (KBWB) . Up 20.5% this year, KBWB is home to bank behemoths like Citigroup (NYSE: C), Bank of America (BAC), J.P. Morgan Chase (JPM) and Wells Fargo (WFC). In that order, those stocks combine for over a third of KBWB’s weight. [Regional Bank ETF: Leader Turning Laggard]

Even with that substantial allocation to America’s largest banks, few if any of which can be considered truly regional, the rest of KBWB’s 20-stock is heavily concentrated in more pure play regional banking names. That could bode well for $141.4 million ETF is interest rates continue to rise.

“However, unlike most corporations, banks tend to perform well in a rising rate environment. They borrow at low, short-term rates and lend at higher, long-term rates. And as interest rates rise, their profits increase from the widening spread. The Federal Reserve has stated that the discount rate will remain near zero until unemployment and inflation targets are met, which may not be until around 2015,” said Citrin Group analyst Reed Eckhout in an interview with Investor’s Business Daily.

Eckhout went on to tell IBD: “Even though financials have had a solid rally this year, they are still in the early innings of their full potential performance. U.S. financials just finished the second-quarter earnings season with 79% of companies beating expectations — the highest rate among all sectors .”

Of note to investors is the long-term track record of the KBW Bank Index, KBWB’s underlying index. This year and over the past year, the index has outpaced the S&P 500 Financial Services Index by about 150 basis points. Over the past five years, KBWB’s index has offered more than double the returns of the S&P 500 Financial Services Index.

PowerShares KBW Bank Portfolio

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KBWB

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of KRE.

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.

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