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
