Regional banking ETFs have been among the top sector performers the past two weeks as investors take a second look at smaller lenders to profit from rising interest rates and a steeper yield curve.
SPDR S&P Regional Banking ETF (NYSEArca: KRE) is up 2.6% for the trailing month while iShares Core S&P 500 ETF (NYSEArca: IVV) is off 1.9%. KRE shuns the large money-center banks to focus on smaller regional lenders.
Top holdings in the regional bank ETF include Zions Bancorp. (NasdaqGS: ZION), M&T Bank Corp. (NYSE: MTB) and Regions Financial (NYSE: RF).
“Another smaller, less liquid regional banks ETF, iShares Dow Jones US Regional Banks (NYSEArca: IAT), offers similar niche exposure. However, it includes a handful of superregional banks,” says Morningstar analyst Robert Goldsborough. “Also, in contrast to KRE, IAT weights its holdings by market cap, which makes its portfolio top-heavy and gives it a much higher average market cap.”
Regional banks, not surprisingly, follow the fortunes of their local economies and housing markets.
These lenders are also sensitive to the shape of the yield curve.