Broad regulatory restrictions were placed on the banking industry, following the financial downturn. However, small-cap financial exchange traded funds may outperform as the smaller Main Street banks pushes for regulators to relax Dodd-Frank rules that were intended for Wall Street.
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 takes a greater tilt toward small-caps at 73.9% and micro-caps at 26.1%. QABA includes mid-cap 25.9%, small-cap 36.7% and micro-cap 37.4%.
Small bankers have been arguing with regulators that many of the new financial rules intended for big banks are unjustly burdening community banks by impeding growth and their ability to generate a profit and lend, the Wall Street Journal reports.
There is “plenty of economic analysis and data that says that our country’s economy is being harmed…because of regulatory costs” on small and medium-size banks, Sen. Jerry Moran (R., Kan.), said in the article. “There’s a real interest in addressing that issue.”
The lobbying is beginning to work. Last week, the Federal Reserve and Consumer Financial Protection Bureau moved to relax restrictions on lending and acquisitions for smaller banks. Community banks, though, contend that other areas may also need adjustments, pointing to international capital rules, additional mortgage lending relief for banks with up to $10 billion in assets and a broad exemption from enforcement by the CFPB.
In contrast, large Wall Street banks are up against greater scrutiny. For instance, President Barack Obama proposed new fees for the large financial institutions in the latest 2016 budget. [New Tax Proposal Targets Financial Sector, ETFs]
“The environment is only getting worse for the biggest banks,” Isaac Boltanksy, a policy analyst with Compass Point Research & Trading LLC, said in the article. “The community guys are going to get the biggest benefit of policy changes in 2015.”
Additionally, investors who want to target the small-cap category in the financial space but still want some steady exposure to slightly larger companies can also consider equal-weight index-based ETFs as well. For example, the SPDR S&P Bank ETF (NYSEArca: KBE) includes a 7.9% tilt toward mega-caps, 6.5% to large-caps, 41.4% to mid-caps and 44.2% to small-caps, and the SPDR S&P Regional Banking ETF (NYSEArca: KRE) leans more toward small-caps at 53.7%, along with mid-caps 28.5%, micro-caps 13.5% and large-caps 4.3%.
For more information on the financial sector, visit our financial category.
Max Chen contributed to this article.