Victimized by last year’s epic decline by 10-year Treasury yields, regional bank exchange traded funds staggered to mediocre annual returns. For example, the SPDR S&P Regional Banking ETF (NYSEArca: KRE), the largest regional bank ETF, returned just 1.8% last year, a meager showing compared to the 15.1% returned by the Financial Select Sector SPDR (NYSEArca: XLF).
With the broader financial services sector struggling to start 2015, KRE and rival regional bank ETFs are feeling the heat. KRE is lower by 9.7%, again well behind the 5.5% shed by XLF.
Earlier Tuesday, Regions Financial (NYSE: RF), which has a weight of 1.33% in the equal-weight KRE, “reported a surprising miss on fourth-quarter earnings of 14 cents a share, below consensus of 21 cents a share. Some of that could be attributed to legal accruals and a charge for closing 50 branches a year, but loan growth seems to have been decent, fee income weaker, and there was higher expenses, and a lower tax rate,” according to CNBC.
As is usually the case with regional banks and the corresponding ETFs, interest rates remain a sticking point.
“We continue to believe the primary risk for regional banks is lower long-term rates while the Fed is raising short rates. In this scenario, we believe short-duration, asset-sensitive banks have more upside as well as less downside estimate risk if rates do not rise, as we believe the longer-duration balance sheet banks will likely experience greater reinvestment risk,” said Guggenheim Securities in a note posted by Barron’s earlier this month.