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Regional Rebound Would Help Bank ETFs


Regional bank stocks and the exchange traded funds that hold those stocks soared in 2013 as 10-year Treasury yields surged, but that trend has reversed this year with yields tumbling 15.1%.

Tumbling interest rates have punished regional bank ETFs that were bid higher last year on expectations that higher rates were here to stay, a catalyst that was seen as boosting net interest margins for the holdings of funds such as the SPDR S&P Regional Banking ETF (KRE) .

KRE, the largest regional bank ETF has lost 6.4% since its March 20 peak and some technicians see further weakness ahead for the fund.

“A 20-month trendline from November 2012 – the time when the broad market began its current bull run – has been broken to the downside. Last month, the ETF bounced off a longer trendline from October 2011 but with such an unimpressive rebound in terms of technical indicators and relative performance it does not bode well. Savvy chart watchers can already see a possible head-and-shoulders, a pattern marked with two peaks surrounding a higher peak in between,” reports Michael Kahn for Barron’s.

While KRE’s near-term price action must be observed and should not be defied, the ETF still offers opportunity.

An improving U.S. economy could foster increased borrowing and financing by businesses, large and small, across the U.S. while benign mortgage rates could also provide a lift to the mortgage lending operations of regional banks. [Regional Bank ETFs Still Have Potential]

Additionally, some of KRE’s marquee components have firmed in the past month. Although the $2.3 billion KRE is an equal weight fund, some of the larger regional banks held by the ETF have perked up in recent weeks.

For example, shares of BB&T (BBT) are up 2% in the past month while PNC Financial Services (PNC) is up 1%. KeyCorp (KEY) and SunTrust (STI) are each up 1.6% since early May. PNC, KeyCorp and SunTrust are all top-10 holdings in KRE.

The wildcard for KRE and rival ETFs remains interest rates.

“The stocks in KRE have an average beta of +0.44 to moves in the US 10 Year Treasury, meaning that KRE’s holdings have increased 0.44% on average for every 1.00% move in the 10 Year. As the yield curve rises and the Fed gradually ends quantitative easing, KRE may continue to benefit,” State Street Vice President and Head of Research David Mazza to ETF Trends in April. [Don't Forget This ETF as Rates Rise]

SPDR S&P Regional Banking ETF