After long, low interest rate-induced slumbers, regional bank exchange traded funds have been awakening, cementing their resurgence with a batch of 52-week highs today.
To this point in Tuesday’s session, just under 40 ETFs have made new 52-week highs. Three of those funds are the SPDR S&P Regional Banking ETF (NYSEArca: KRE), the largest regional bank ETF; iShares U.S. Regional Banks ETF (NYSEArca: IAT) and the PowerShares KBW Regional Bank Portfolio (NYSEArca: KBWR).
Recent outperformance by regional bank ETFs is notable. Over the past 90 days, Financial Select Sector SPDR (NYSEArca: XLF), the largest financial services ETF, is up 2.4%, but the aforementioned trio of regional banks have returned an average of 6.4% over the same period. The regional bank ETF resurgence has, not surprisingly, coincided with rising Treasury yields.
“The low rates, which have stuck around longer than many expected, hurt bread-and-butter lenders who gather deposits and make loans. The reason: Such banks, although flush with deposits, can’t earn a high enough rate on loans to boost their profit margins,” reports Peter Rudegeair for the Wall Street Journal.
Over the past three months, 10-year Treasury yields have jumped nearly 10%. KRE confirms the advantage of rising rates for regional bank ETFs. Last year, the SPDR fund rose less than 2% after soaring about 47% in 2013. The iShares fund (IAT), by contrast, returned 7.5% last year after a 38% gain the prior year,” according to the Wall Street Journal. KRE’s holdings have an average beta of +0.44 to moves in the US 10 Year Treasury. [These Regional Bank ETFs Aren’t Twins]
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.
Still, first-quarter earnings for regional banks were tepid as seasonal factors and net interest margin issues weighed. In a recent report on the group, Goldman Sachs sounded a bullish tone on some regional banks while expressing caution on others.
Goldman sees upside potential of 14% for SunTrust (NYSE: STI), 13% for M&T Bank (NYSE: MTB), 12% for Signature Bank (NasdaqGS: SBNY) and 11% for Regionals Financial (NYSE: RF). Those stocks combine for 15% of IAT.
KRE is an equal-weight ETF where none of its 91 holdings garner a weight above 1.4%. The aforementioned stocks combine for almost 5% of KRE’s weight. KBWR, which tracks the KBW Regional Banking Index, has an almost 3% weight to Signature Bank. [Head to Bank ETFs]
PowerShares KBW Regional Banking Portfolio