Exchange traded funds (ETFs) focused on regional banking shares have tended to outperform the broad sector. Why is this area of the troubled financial system coming out ahead?
Overall, there is speculation that smaller lenders’ credit losses are easing and that they will be less affected by potential financial regulations, John Spence for The Wall Street Journal says. This may explain why regional banking shares are performing well, compared to the rest of the financial sector. [Why regional banks are coming out on top.]
The SPDR KBW Regional Banking (NYSEArca: KRE) is up 11.9% so far this year, while the S&P 500 is down 1.6%. Regional banks are also trouncing the broader financial sector: in the last three months, KRE is up 17.6%, while the Financial Select Sector SPDR (NYSEArca: XLF) is down 1.4%. [Pros and cons of regional banks.]
Aside from benefiting from Obama’s calls for new policies toward larger banks, regional banks have to other things going for them:
- Stronger earnings and outlook. KeyCorp (NYSE: KEY) and Fifth Third Bancorp (NASDAQ: FITB) posted strong earnings, while SunTrust (NYSE: STI) got a nod from Goldman Sachs analysts, who called it their “best idea” in the sector.
- Less exposure. Regional banks had less exposure to subprime mortgages and other risky securities relative to big banks, which saw their stocks crumble in the financial crisis. Be cautious, though, because regional banks aren’t out of the woods. High unemployment could dog the sector and ETFs and consumers struggle to pay down credit card debt.
For more stories about regional banks, visit our regional banks category.
- SPDR KBW Regional Banking (NYSEArca: KRE)
- Regional Bank HOLDRs (NYSEArca: RKH)
- iShares Dow Jones U.S. Regional Banks (NYSEArca: IAT)
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.