Whiles regional banks may benefit from higher rates and provide attractive returns, these smaller financial stocks tend to be riskier or more volatile than their larger, more diversified counterparts.
“The difference with the regionals is that since they’re less diversified, they’re more dependent on making money from loans and more dependent on making those commercial and personal loans,” Miller added. “That’s why you’re going to see them the most affected.”
Investors can also consider broad financial sector ETFs to capture the potential growth. For instance, the Financial Select Sector SPDR (NYSEArca: XLF) has 37.0% allocated to banks. Alternatively, the SPDR S&P Bank ETF (NYSEArca: KBE) targets banks, with some exposure to larger companies like Bank of America (NYSE: BAC), JPMorgan (NYSE: JPM) and Citigroup (NYSE: C), with a 72.1% position in regional banks. [Financial ETFs Could Outperform Ahead of Fed Tightening]
For more information on the banking sector, visit our financial category.
Max Chen contributed to this article.