Regional banks are one of the best ways to gain exposure to the outperforming financial sector even though U.S banks have faced much uncertainty over the past few years. Exchange traded funds tracking regional banks focus in on the health of local markets, while offering diversification benefits.
“Retail customers and local small and midsized companies tend to represent a large portion of regional banks’ customer base. However, many regional banks lack sufficient scale to match larger banks’ cost efficiency, which may make them less competitive in a low-interest-rate environment. Additionally, they don’t fall under the “too big to fail” umbrella, so they may not receive government support if they get into trouble,” Alex Bryan wrote for Morningstar. [Sector ETFs for Obama and the Fiscal Cliff]
The SPDR S&P Regional Banking ETF (NYSEArca: KRE) includes about 76 regional banks in the index that are in a good position to weather market volatility. Due to the smaller size of the banks in the index, the fund can be subject to market volatility that would not otherwise affect a big bank. For instance, changes in employment patterns and consumer confidence can impact regional banks more intensely. [Regional Bank ETFs Under the Microscope]
An alternative option is the SPDR S&P Bank ETF (NYSEArca: KBE) which focuses in on larger, commercial banks. None of the holdings in KRE coincide with KBE, which makes them suitable holdings to have within a portfolio at the same time. This way investors can be sure to gain exposure to performance advantages of both while hedging any risk factors. [S&P’s Picks for Regional Bank ETFs]
Another regional bank focused ETF is the iShares Dow Jones US Regional Bank (NYSEArca: IAT). This fund focuses in on the smallest regional banks. PowerShares Dynamic Banking (NYSEArca: PJB) has the same small-cap focus as KRE, but selects banks based on valuations and risk factors, rather than an equal-weight approach.
Regional banks haven’t been as strong as the big banks but a recent breakout is encouraging from a technical perspective, says Arthur Hill at StockCharts.
Tisha Guerrero 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.