As expected, this earnings season has been pretty underwhelming. Companies in a number of sectors have posted sluggish quarters, failing to beat analyst estimates, or suggesting that future quarters will not be as robust.
While there have been a handful of winners—such as Apple, Texas Instruments, and a few industrial names—the real winner has continued to be in the financial space. This corner of the market has thoroughly crushed estimates and many firms are giving solid outlooks as well (see Surging Financial ETFs Beating the Market).
Thanks to this trend, the financial sector has surged over the past few weeks, easily outpacing the broad market in the process. And with uncertain earnings hitting a variety of sectors, this outperformance could continue for this market sector.
How to Play
While the trend has hit the broad financial space, making ETFs like XLF interesting choices, the real gains have been concentrated in the regional banking sector. This is because this space is the best positioned to take advantage of a steeper yield curve and the current market environment.
After all, with a steeper yield curve, banks have an easier time making profits thanks to a bigger spread between rates on deposits and loans. And since most regional banks have a domestic focus, they have avoided the worst of the global downturn, making them excellent picks to benefit from international trends as well (see 3 Top Ranked Financial ETFs to Buy Now).
If investors are looking to gain exposure to this trend, they may want to take another look at the following ETFs, as these offer concentrated exposure to regional banking firms which could be not only winners this earnings season, but for months to come as well:
SPDR S&P Regional Banking ETF (KRE)
This popular ETF follows the S&P Regional Banks Select Industry Index, charging investors 35 basis points a year in fees. The product uses an equal weighting system, and it is clearly a top way for investors to access the space as volume tops two million shares a day while the assets under management is well over $2.3 billion.
Due to the equal weight nature of the product though, the ETF skews towards small and mid cap securities, putting less than 15% of the fund in large caps. Instead, small caps reign with close to half the portfolio, although it should be noted that the product still has a value tilt from a style perspective.
The fund currently has a Zacks ETF Rank of 2 or ‘Buy’ and it has added about 14.1% in the past one month period (see Time to Bank on Regional Bank ETFs?).
iShares US Regional Banks ETF (IAT)
This product tracks the Dow Jones US Select Regional Banks Index, giving investors exposure to nearly 60 stocks. The ETF is relatively popular, having amassed about half a billion in assets, although it does volume of just 130,000 shares a day.
The cap weighted ETF is a little concentrated in some of the big names in the industry though, giving the fund a large cap focus. US Bancorp (USB) takes the top spot at 18.5% of assets, followed by PNC at 11.1% of assets and then BB&T (BBT) at 6.9% (see 3 All-American ETFs to Buy Now).
The ETF currently has a Zacks ETF Rank of 3 or Hold, though it has added about 10.7% in the last one month time frame.
SPDR S&P Bank ETF (KBE)
While not a pure regional bank ETF, this equal-weighted product does afford a significant allocation to the space. In fact, close to 70% of the fund’s assets go to regional banks, while roughly 13% go to thrifts & mortgage finance companies, 6.4% to diversified banks, and 6.3% to other diversified financials.
This approach also seems to be pretty popular with investors, as over $2.5 billion is invested in the fund, while average volume is north of 1.7 million shares a day. Once again though, the focus on equal-weighting does give a tilt towards smaller securities, though large caps account for about 30% of assets here.
This ETF also has a Zacks ETF Rank of 2 or ‘Buy’ while the product has added 12.9% in the past one month period.
Financials have been a strong performer this earnings season, accounting for the bulk of the growth in the entire market. Companies have also managed to post solid outlooks, suggesting that this trend could easily continue heading into autumn as well (also see 3 Hot Sector ETFs Surging to #1 Ranks).
Given this, a look to the space could be warranted, though ETFs that focus on regional banks seem the best choices. That is because these funds are exposed to one of the best positioned segments of the financial world and are beneficiaries from both a steeper yield curve and a lack of foreign exposure, two factors which look to be increasingly important to stock performance once we get out of earnings season.
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