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Bank on This ETF for Earnings Season


Second-quarter earnings season gets started today when Dow component Alcoa (AA) reports after the close of U.S. markets, but investors may want temper their expectations when it comes to upside surprises. Companies have already been tipping their hands that this earnings seasons could be a trying one.

Citigroup recently said preannouncements were the most negative since 2009 and that there were nearly seven negative preannouncement for each positive one, report Randall Forsyth and Johanna Bennett for Barron’s. Data from S&P Capital IQ in the Barron’s piece indicate six of the 10 S&P 500 sectors are expected to report negative earnings growth for the second quarter.

Investors looking for a potential standout should consider financial services. The second-largest sector weight in the S&P 500 is expected to post earnings growth of nearly 16% and it could be regional bank stocks and ETFs that best serve investors when bank profit reports start rolling in. Investors have already been pumping cash into financial services such as the Financial Select Sector SPDR (XLF) and the SPDR S&P Bank ETF (KBE) , but the SPDR S&P Regional Banking ETF (KRE) looks strong as well. [Investors Pumping Cash Into Bank ETFs]

Regional bank stocks and ETFs such as KRE have already been identified as potential winners in a rising interest rate environment. Some regional banks have seen their earnings crimped by low interest rates. Net interest margin, or the spread between the average yield on loans and securities investments and a bank’s borrowing deposits costs, has pressured earnings power for regional banks, but a steepening yield curve could mitigate further NIM downside. [Regional Bank ETFs Could Benefit From Rising Rates]

KRE, which home to almost 80 stocks, has already benefited from rising 10-year Treasury yields. Since late May, the ETF has hauled in nearly $500 million in new capital, bring its assets under management total to almost $2 billion. More importantly, since 10-year Treasury yields began rising in earnest at the start of June, KRE has jumped 9.4%.

Rising rates recently prompted Citigroup analysts to their stock price estimates for 10 regional banks, and predicted that other analysts would soon follow suit, reports Christina Rexrode for the Associated Press.

Positive catalysts such as positive earnings revisions and analyst upgrades for KRE constituents would be icing on the cake for an ETF that jumped 6.1% last week while hitting a new 52-week high last Friday. KRE’s top-10 holdings include SVB Financial (SIVB), Cullen-Frost (CFR) and Warren Buffett favorite M&T Bank (MTB).

SPDR S&P Regional Banking ETF

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.