Regional bank exchange traded funds have been rallying the past few weeks to lead the financial sector and outperform large-cap banks.
Year to date through Jan. 11, SPDR S&P Regional Banking ETF (NYSEArca: KRE) was up 7.4%, more than doubling the 2.9% gain for the S&P 500, according to Morningstar. [Regional Bank ETFs Display Financial-Sector Strength]
Trading in options based on the regional bank ETF have skyrocketed recently as investors use the fund to play the breakout or hedge, according to Street One Financial. [ETF Chart of the Day: Regional Banks]
S&P Capital IQ recently boosted its outlook on U.S. regional banks to positive from neutral as the sector gears up for earnings season.
Bank ETFs ended 2011 in the red, although regionals performed much better than large-caps.
“Bank valuations were heavily weighed down in 2011 by a trifecta of bad news, including the Japanese tsunami and nuclear disaster, the U.S. economic slowdown with total federal gridlock and accompanying sovereign debt downgrade, and the seemingly never-ending European debt and banking crisis,” S&P analyst Erik Oja said in a note this week. “At times, it looked like 2008 all over again, but thankfully history didn’t repeat itself that quickly.”
However, 2012 looks to be a better year for bank ETFs, as long as the Eurozone debt crisis doesn’t blow up and require emergency financial assistance for banks.
“The U.S. has not slipped back into recession, and employment and manufacturing statistics are showing strength. Japan appears to be recovering well from last year’s events, and Asian tech and auto supply chains are up to speed supplying U.S. factories and consumers,” S&P said.
“Stability is evident almost everywhere, in sharp contrast to last year. The ‘green shoots’ of 2009, which promised so much and delivered so little, may now be for real. That would provide solid support for bank lending, interest rate spreads and capital cushions,” Oja wrote. “Also, the U.S. federal government tug-of-war between a president who was elected with a large mandate in 2008 and a Congress elected in 2010 to stop presidential over-reach, has settled into what seems like an armed standoff, not a good situation, but at least one that is stable.”
S&P recommends iShares Dow Jones US Regional Banks (NYSEArca: IAT) and SPDR S&P Regional Banking ETF to get exposure to the sector. The ETFs’ holdings include PNC, Fifth Third, BB&T, SunTrust and Regions Financial.
iShares Dow Jones US Regional Banks
