Financial services ETFs, such as the group’s behemoths the Financial Services Select Sector SPDR (NYSEArca: XLF) and the Vanguard Financials ETF (NYSEArca: VFH), have been stellar performers in 2013. That much is highlighted by the average return of XLF and VFH, which is a tidy 21%.
Regional banks and the corresponding ETFs have been solid performers, but laggards in comparison to XLF, VFH and related fare. It is an easy scenario to explain. XLF and VFH have benefited from exposure to the largest U.S. banks such as Bank of America (NYSE: BAC), J.P. Morgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC). [The Case For Financial Sector ETFs]
Some regional banks have seen their earnings crimped by low interest rates. Net interest margin, or the spread between the average yield on loans and securities investments and a bank’s borrowing deposits costs, has pressured earnings power for regional banks, but a steepening yield curve could limit further NIM downside. [REIT ETFs Punished By Rising Rates]
“A 100 basis point — 1 percentage point — rise would likely be positive for banks because it will boost margins without meaningfully hurting book value,” reports Shanthi Bharatwaj for TheStreet.com. Higher rates increase the spreads between rates earned on loans and investments and the interest paid to depositors.
Investors looking to profit from rising rates via regional bank ETFs have a few options, including the $1.5 billion SPDR S&P Regional Banking ETF (NYSEArca: KRE). Home to 78 stocks, KRE is a quasi-equal weight play on regional banks as no single holding receives an allocation of more than 1.98%.
Whereas some ETFs sport the regional bank tag only to be heavy on large-cap super regionals such as US Bancorp (NYSE: USB) and PNC Financial (NYSE: PNC), KRE represents more a pure play on regional banks with a weighted average market capitalization of $4.4 billion. KRE has gained 18.1% year-to-date. [Regional Bank ETFs For Financial Sector Exposure]