Many are already shifting around their investment portfolios to adapt to potential rate hikes next year, but investors can capitalize on a rising rate environment with regional bank exchange traded funds.
Market observers argue that regional banks will profit from the onset of rate hikes in 2015 as banks’ operating models allow for larger return on loans, reports Elizabeth Schulze for CNBC.
“If you just look at rising interest rates, the regional banks will give you the most ‘bang for that buck’ so to speak,” Scott Miller Jr., a managing partner at Blue Bell Private Wealth Management, said in the article.
For instance, ETF investors can choose form a handful of regional-bank-specific ETFs, including the SPDR S&P Regional Banking ETF (NYSEArca: KRE), iShares U.S. Regional Banks ETF (NYSEArca: IAT) and PowerShares KBW Regional Bank Portfolio (NYSEArca: KBWR). [Not Believing Yellen, Regional Bank ETF Pops]
KRE takes an equally weighted approach, with its largest holding coming in at only 1.5% of the portfolio. KBWR also tracks an equal-weight index of regional banks. However, KRE has a slightly more diversified portfolio with 81 holdings, compared to KBWR’s 50 components.
IAT, on the other hand, takes a market-cap-weighted approach, with US Bancorp (NYSE: USB) accounting for 20.3% of the ETF’s underlying holdings, followed by PNC Financial (NYSE: PNC) 12.4% and BB&T (NYSE: BBT) 7.2%.
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.