After what feels like an eternity (it really wasn’t), the SPDR S&P Regional Banking ETF (NYSEArca: KRE), the largest regional bank ETF, is breaking out.
Proving how important higher interest rates are to regional banks, 10-year Treasury yields jumped 4.1% to 2.4% last Friday, aiding an almost 2% gain for KRE, helping the ETF close at its highest levels since October 2007. KRE accomplished that feat on volume that was nearly 72% above the daily average, so it is not a stretch to say a long-awaited breakout has arrived for the ETF.
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.
Captain John Charts notes KRE’s point and figure chart has a bullish price objective of $53, or 21.4% above where the fund closed on Friday. Predictably, KRE’s breakout is coinciding with one for 10-year yields, helping drive the ETF’s recent out-performance of the S&P 500.
“From a relative strength perspective, the Regionals are banking on continued out performance based on the Head & Shoulder breakout vs. the S&P 500,” according to Captain John Charts.
KRE’s sensitivity to interest rates is well known. The ETF rose just 2% last year after surging 47% in 2013 when yields spiked. KRE’s holdings have an average beta of +0.44 to moves in the US 10 Year Treasury.
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. [These Regional Bank ETFs Aren’t Twins]
Investors are not waiting for the Fed to raise interest rates, which will help regional banks’ net interest margins, before piling into KRE. The ETF has added nearly $120 million in new assets this month after adding $243.4 million in new investments last month. [Investors Flocked to These Sector ETFs in May]
Those inflows are a stark reversal in trend that saw KRE lose $414 million in assets this year through May 18.
KRE Relative Strength vs. S&P 500
Chart Courtesy: Captain John Charts