Investors can diversify financial sector holdings with an exchange traded fund that tracks smaller regional banks, which is breaking out to new 52-week highs.
The SPDR S&P Regional Banking ETF (KRE) hit a new 52-week high of 37.73 but ended relatively flat Wednesday. KRE has gained 36.1% year-to-date.
Regional banks are generally “less correlated than that of national money-center banks,” according to Morningstar analyst Robert Goldsborough. “Unlike the mega-banks, regional banks’ performance is more closely tied to the health of their local markets, which can vary meaningfully.”
Specifically, regional banks cater toward local retail customers, small- and mid-sized companies. Consequently, there is a certain type of customer concentration in specific markets, but the customer base won’t be the same across multiple regional banks.
The focus on smaller regional banks has helped KRE outperform the broader U.S. financial services sector ETF Financial Sector SPDR Fund (XLF) , which is up 29.0% year-to-date.
However, potential investors should be aware that regional banks may be unable to match larger banks in a low-interest-rate environment.
“Some regional banks may lack sufficient scale to match larger banks’ cost efficiency,” Goldsborough added.
Rates could rise again and regional banks could still have their moment to shine. 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. [Regional Bank ETFs Show Promise as Rates Rise]
Additionally, regional banks, unlike large financial institutions, are not “too big to fail,” so these companies will be riskier in a financial meltdown.
Looking at KRE’s holdings, component stocks are equally weighted, which makes the ETF’s portfolio lean toward the smaller end of the regional banking sector. The fund’s market capitalization allocations include large-cap 7.6%, mid-cap 28.8%, small-cap 55.7% and micro-cap 7.9%.
Top holdings include PrivateBancorp 1.7%, East West Bancorp 1.7% and SVB Financial Group 1.7%.
SPDR S&P Regional Banking ETF
For more information on regional banks, visit our regional banks category.
Max Chen contributed to this article.
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.