Investors that are familiar with the SPDR S&P Regional Banking ETF (NYSEArca: KRE) have been down this road before. That road being wondering when KRE and rival regional bank ETFs will finally cease being disappointments.
Again, investors have heard this before, but KRE could be awakening from its long slumber. Regional banks and ETFs such as KRE wear the “rate sensitive” label, a burden in years like 2014 when Treasury yields slide, but a gift in a recent when those yields soar.
Over the past five days, 10-year Treasury yields have jumped nearly 12%, helping lift KRE by nearly 2.6%. Think regional banks aren’t sensitive to interest rates? Think again. Over that same five-day period, KRE has topped the less rate-sensitve Financial Select Sector SPDR (NYSEArca: XLF) by about 70 basis points. [Regional Bank ETF Looking Good]
“Currently the Relative Strength Index (RSI) has been making lower highs while also staying above ‘oversold’ territory and in a somewhat of a bullish range. If buyers continue to step in then we could see the RSI indicator break out from its multi-week down trend,” writes Andrew Thrasher, investment analyst with Financial Enhancement Group, in reference to KRE.
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]
“While KRE has been in trading range for a year, this consolidation is occurring after an up trend, which is a bullish characteristic and could lead to another leg higher for the industry as the up trend does in fact continue,” adds Thrasher.
ETFs with exposure to regional banks have actually benefited from rising interest rates because investors believe higher interest rates will lead to increased net interest margin for regional banks.
Reminding investors of just how sensitive regional banks are to interest rate changes are these statistics. When Treasury yields jumped in 2013, KRE surged 47.5%. Amid the 2014 yield retreat, the ETF rose just 1.8% while the S&P 500 climbed 13.5%. KRE’s holdings have an average beta of +0.44 to moves in the US 10 Year Treasury. [Regional Rebound Could Lift Bank ETFs]
KRE is home to 86 stocks and a trailing 12-month dividend yield of 1.63%.
SPDR S&P Regional Banking ETF
Chart Courtesy: Andrew Thrasher