With expectations for a Federal Reserve rate hike cooling in light of the weak first quarter economic data, smaller regional bank-related exchange traded funds are outperforming Wall Street banks.
The SPDR S&P Regional Banking ETF (NYSEArca: KRE), the largest regional bank ETF, increased 3.0% year-to-date. KRE has the largest tilt toward smaller banks, including 18.5% micro-caps, 53.8% small-caps and 24.0% mid-caps.
Additionally, the SPDR S&P Bank ETF (NYSEArca: KBE), which leans toward slightly larger companies, gained 3.4% so far this. KBE includes 47.6% small-caps, 36.5%, mid-caps, 8.0% large-caps and 8.0% mega-caps.
As we move higher up the capitalization chain, we see that larger banks have slowed down. For instance, while the iShares U.S. Regional Banks ETF (NYSEArca: IAT) shares a similar moniker, the IAT includes 19.2% small-caps, 36.4% mid-caps, 24.9% large-caps and 19.5% mega-caps, and the fund only rose 2.0% year-to-date. [Similar Names, but These Bank ETFs Aren’t Twins]
Lastly, the Financial Select Sector SPDR (NYSEArca: XLF), which tracks the large-cap financial names from the S&P 500 Index, is only up 0.1% year-to-date.
According to SNL Financial, banks and thrift stocks with a market-cap above $50 billion dipped 1.8% over the first four months of the year, whereas banks and thrifts with a market-cap between $5 billion and $10 billion gained 7.2%, reports Nicole Bullock for the Financial Times.
“In the small bank world, there is much more rapid loan growth and they have more flexibility with capital,” Fred Cannon, director of research at KBW, said in the FT article. “They are paying more dividends, buying back more shares and doing M&A.”
Large financial stocks are slowing down as the fixed-income market diminished expectations for a Fed rate hike anytime soon – higher interest rates bolster banks as lenders earn more from their loans. [Uptick in Rates is a Boon for Bank ETFs]
Moreover, small banks have been left relatively unscathed by the recent bout of litigation fees and regulatory fines levied onto the larger banks. For instance, the world’s biggest banks, including JPMorgan (NYSE: JPM) and Citigroup (NYSE: C), among others, are finalizing plans to collectively pay over $6 billion for allegedly manipulating foreign exchange markets.
“If you look overall since the financial crisis, you have continued regulatory pressure on big banks,” Cannon added.
Nevertheless, Gerard Cassidy, head of bank equity research at RBC, argues that big banks could turn around if the Fed funds rate is 25 to 30 basis points and volatility helps fuel capital markets businesses.
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Max Chen contributed to this article.