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.
“It 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.
“Their balance sheets are pretty easily investigated by us and their lending falls in a fairly discrete number of forms,” Torullo said.
Consequently, Torullo suggests raising the threshold to banks holding companies with $100 billion in assets from banks with $50 billion, while others in the industry want it raised to $250 billion, which would only cover the three largest regional banks, Capital One Financial (NYSE: COF), U.S. Bancorp (NYSE: USB) and PNC Financial Service Group (NYSE: PNC).
Investors who want to target the small-cap category in the financial space but still want some steady exposure to larger companies can also consider equal-weight index-based ETFs as well.
For example, the SPDR S&P Bank ETF (NYSEArca: KBE) includes a 42.8% tilt toward mid-caps and 39.2% to small-caps, and the SPDR S&P Regional Banking ETF (NYSEArca: KRE) leans more toward small-caps at 55.8% and micro-caps 12.0%, along with a 26.7% position in mid-caps.
For more information on the financials sector, visit our financial category.