In the wake of the Federal Reserve’s recently completed stress tests, which allowed some big U.S. banks to boost buybacks and dividends, financial services exchange traded funds have solid though not spectacular performers.
Over the past week, the Financial Select Sector SPDR (NYSEArca: XLF); the largest financial services ETF, the SPDR S&P Bank ETF (NYSEArca: KBE) and the SPDR S&P Regional Banking ETF (NYSEArca: KRE) are up an average of half a percent. Over the past year, XLF has climbed nearly 9%, but the ETF, like many of the stocks it holds, is nowhere close to close to historical highs. [ETFs Still not Near Pre-Crisis Highs]
“Despite spectacular bull markets on Wall Street, excess liquidity and historically low interest rates, US banks are currently near 75-year lows versus the S&P 500 index,” according to a note from Bank of America Merrill Lynch (BAML).
For its part, XLF, an ETF that debuted in 1998, currently resides around $24.50, or nearly 63% below its all-time high reached in May 2007. The $2.4 billion KBE, which debuted in late 2005, would need to rise more than 70% to reclaim its 2007 high. KRE, the largest regional bank ETF, is closer to reaching old highs, but would still need a rally of roughly 25% to accomplish that objective.
“The record low was reached in February 2009. The relative performance of banks has stabilized in the past three years as the US housing market has started to recover,” notes Bank of America Merrill Lynch.
Near-term catalysts exist for bank ETFs, particularly the rate-sensitive KRE, now that the Federal Reserve the word “patient” from its interest rate verbiage.
“The Federal Reserve may remove ‘patience’ from its forward guidance on rates this week, which the market may interpret as rate hikes being eminent in June,” said State Street Global Advisors Head of Research David Mazza in an email exchange with ETF Trends. “Financial services firms, such capital markets , banks (KBE), and regional banks (KRE) rank as the top 3 industries with the highest sensitivity to the 10 year yield.” [Some Bank ETFs to Bank On]
As BAML notes, “other sectors have proved greater beneficiaries of lower rates,” than financial services, but rates poised to rise, the sector could be in for an extended period of leadership.
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.
SPDR S&P Regional Banking ETF
Todd Shriber owns shares of XLF.