Yes, the SPDR S&P Regional Banking ETF (NYSEArca: KRE), the largest regional bank exchange traded fund, shed 1.1% Thursday, but does not mean the much maligned KRE and rival regional bank ETFs have not been solid performers in recent weeks.
KRE has been just that. Over the past month, the ETF is higher by nearly 10%, a performance that soundly thumps the 7.5% returned by the S&P 500 over the same period. KRE is also topping broader financial services ETFs, which to their credit have also been perking up. Over the past month, KRE has outpaced the Financial Select Sector SPDR (NYSEArca: XLF) by 120 basis points.
There are signs that the run for regional banks and the corresponding ETFs may be in its nascent stages. For example, Wednesday’s new high list was comprised of about 200 stocks of which 26 were regional banks, according to Aaron Jackson of See It Market.
See It Market notes that KRE’s relative strength as measured against XLF, the largest financial services ETF, is improving. That could be a sign that investors are betting on increased strength across the entire financial services sector or that some investors are betting on higher interest rates while using KRE to express that view. [Regional Bank ETFs Could be Ready to Party]
Investors that know KRE know the ETF’s utility and sensitivity to interest rates. After last year’s 47.5% surge, KRE has been experiencing that sensitivity to interest rates this year as 10-year Treasury yields have tumbled. KRE applies an equal-weight methodology to its 80 holdings, meaning the ETF is not dominated by just a few bank stocks as so many financial services are.
Additionally, an improving U.S. economy could foster increased borrowing and financing by businesses, large and small, across the U.S. while benign mortgage rates could also provide a lift to the mortgage lending operations of regional banks. ETFs such as KRE benefit as rates rise because investors believe higher interest rates will lead to increased net interest margins for regional banks. [Rising Rates Plays Rise Again]
Valuation bolster the case for regional banks. Regional bank ETFs trade at discounts to the S&P 500 with KRE sporting a price-to-earnings ratio of 15.2 and a price-to-book of 1.3. The S&P 500 trades north of 17 times earnings with a P/B ratio over two.
Still, investors are remaining on the sidelines when it comes to bank ETFs of all stripes and missing out on the recent rally in the process. Since the start of the fourth quarter, XLF has lost $1.1 billion in assets while KRE is lighter by $101.7 million.
SPDR S&P Regional Banking ETF