As Rates Rise, Don’t Forget This Leveraged ETF

When it comes to leveraged financial services exchange traded funds, there are some familiar names. The UltraShort Financials ProShares (NYSEArca: SKF) and the Direxion Daily Financial Bull 3X Shares (NYSEArca: FAS) are among the products active, risk-tolerant traders are familiar with.

With plain vanilla financial services ETFs such as the Financial Select Sector SPDR (NYSEArca: XLF) and the SPDR S&P Bank ETF (NYSEArca: KBE) up 35.2% and 41.3%, respectively, this year, it is clear the financial services sector is soaring. It is also accurate to say bullish leveraged ETFs have worked. [10 Best Leveraged ETFs of 2013]

However, investors may be missing out on one of the picks of the litter: The ProShares Ultra KBW Regional Banking (NYSEArca: KRU). Although regional bank ETFs have garnered favor among investors as Treasury yields have spiked, KRU is still an overlooked ETF. Its returns and the overall bull case surrounding regional banks indicate KRU deserves more attention.

The SPDR S&P Regional Banking ETF (NYSEArca: KRE) has surged 48% this year as ETFs with exposure to regional banks have actually benefited from rising interest rates because investors believe higher interest rates will lead to increased net interest margin for regional banks. [Regional Banks Rally Into Year-End]

Ten-year Treasury yields touched 3% Thursday and some market observers think a run to 3.4% or higher is possible in 2014. That could put KRE and friends in the sweet spot of the yield curve after several years of being crimped by low rates.

To be clear, KRU is not the double-leveraged equivalent of KRE. Rather, the ProShares offering attempts to deliver twice the daily returns of the KBW Regional Banking Index, the underlying index for the PowerShares KBW Regional Banking Portfolio (NYSEArca: KWBR). KRU has actually delivered more than twice the returns of KBWR, which is up 40.3% this year.