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Buy Regional Bank ETFs Ahead of Fed Rate Hike

Neena Mishra

The jobs report for October has greatly increased the chances of a rate hike by the Fed this year. Fed funds futures now indicate a 72% probability of a rate increase at Fed’s December meeting.

 

As a result, investors have started positioning their portfolios for rising rates. The following 10- day chart shows rotation from rate sensitive sectors like Utilities to sectors/sub-sectors that benefit from higher rates like regional banks.





Regional banks have been outperforming other financial ETFs this year and we expect this trend to continue. The banks are now well capitalized and loan growth has been picking up with improving economy.

 

Bigger banks are most exposed to the higher regulatory costs. Capital rules now require big banks to maintain thicker capital cushions than other institutions. While higher capital norms reduce risk, they also reduce profitability. Smaller banks have simpler business models and focus on local clients and benefit from domestic economic recovery.


SPDR S&P Regional Banking ETF (KRE) is the most popular fund in the space with about $2.6 billion in AUM. PowerShares KBW Regional Banking Portfolio (KBWR) is another interesting ETF in the space.  Both these equal-weighted products currently enjoy Zacks ETF Rank # 2 (Buy). To learn more, please watch the short video below:



 

 


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SPDR-KBW REG BK (KRE): ETF Research Reports
 
PWRSH-KBW BP (KBWB): ETF Research Reports
 
ISHARS-US RG BK (IAT): ETF Research Reports
 
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