A rising interest rate environment will throw a wrench into the financial markets. Nevertheless, bank-related exchange traded funds could weather the storm as financial firms have positioned ahead of the potential rate changes.
With a Federal Reserve rate hike expected as soon as the September meeting, Credit Suisse analysts favor JPMorgan Chase (NYSE: JPM), Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC) and Goldman Sachs Group (NYSE: GS) in the large-cap space; BB&T (NYSE: BBT) and KeyCorp (NYSE: KEY) in the midcap space.
ETF investors have a number of Bank-related options available to gain diversified exposure to the space. For instance, the SPDR S&P Regional Banking ETF (NYSEArca: KRE), iShares U.S. Regional Banks ETF (NYSEArca: IAT) and PowerShares KBW Regional Bank Portfolio (NYSEArca: KBWR) all include more mid- and small-sized banks. Additionally, the SPDR S&P Bank ETF (NYSEArca: KBE) leans toward slightly larger companies. [Resurgent Regional Bank ETFs]
KRE, the largest regional bank ETF, increased 4.2% year-to-date. KRE has a large tilt toward smaller banks, including 18.5% micro-caps, 53.8% small-caps and 24.0% mid-caps. The fund includes a 1.2% position in KEY and 1.2% in BBT. [Small Bank ETFs Begin Outpacing Wall Street Bankers]
KBWR rose 4.9% year-to-date. The fund also focuses on the smaller segment, including 12.3% micro-caps, 69.2% small-caps and 18.6% mid-caps.
IAT gained 3.0% year-to-date. The ETF includes 19.2% small-caps, 36.4% mid-caps, 24.9% large-caps and 19.5% mega-caps. KeyCorp is 3.2% and BBT is 7.1% of IAT’s portfolio .
KBE, which leans toward slightly larger companies, gained 4.7% so far this year. KBE includes 47.6% small-caps, 36.5%, mid-caps, 8.0% large-caps and 8.0% mega-caps. The ETF includes JPM 1.7%, BAC 1.6%, WFC 1.6%, KEY 1.6% and BBT 1.6%.
The banks could weather an interest rate hike, but investors should not expect bank stocks to outperform off higher rates.
“While higher rates may well serve as a tailwind for financials firms over the longer term, any immediate benefit from an interest-rate hike for financial-services firms would be muted at best, as higher rates will not translate one-for-one into higher earnings for banks,” according to Morningstar analyst Robert Goldsborough. “Bank earnings and valuations are driven more by net interest margins, which are more stable over time, than by rates themselves.”
For more information on the financial sector, visit our financial category.
Max Chen contributed to this article.