ETF Trends
ETF Trends

As the Fed contemplates exempting small- and mid-sized banks from the tougher regulations imposed following the financial crisis, small-cap financial sector exchange traded funds can capitalize on the looser rules and potentially lower cost to do business.

For instance, the PowerShares S&P SmallCap Financials Portfolio (NYSEArca: PSCF) and First Trust NASDAQ ABA Community Bank Index Fund (NasdaqGM: QABA) both target smaller companies in the financial space.

PSCF includes small-cap and micro-cap stocks. However, the PowerShares ETF covers the broad financial space, which include real estate investment trusts, insurance, capital markets and other services, along with banks. QABA is more or less evenly split between mid-, small- and micro-cap banks.

On Tuesday, Fed Governor Daniel Tarullo, the point man on regulatory matters, argued that regulators should raise the size threshold that determines which U.S. banks fall under tougher rules, such as higher capital requirements and yearly “stress test,” the Wall Street Journal reports.

β€œIt may be time to consider raising some thresholds or eliminating altogether the application of some Dodd-Frank provision to other banks,” Tarullo said during a hearing before the Senate Banking Committee.

Specifically, Tarullo stated Fed officials have found that the regulatory benefit of running medium-sized firms through the annual stress tests is not worth the cost to the banks.

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