U.S. stocks surged Wednesday and so did 10-year Treasury yields. Yields on the benchmark U.S. government bond climbed 2.5% to almost 2.48%, the highest level since September.
That yield spike has been very good news indeed for financial services stocks and exchange traded funds. On Wednesday, 24 ETFs touched new 52-week highs and 15 of those funds track the financial services sector. Not surprisingly, five of those 15 funds were ETFs either heavy on or dedicated to regional banks, including the group’s goliath, the SPDR S&P Regional Banking ETF (NYSEArca: KRE).
KRE rose 1.5% yesterday on volume that was more than 25% above the daily average to continue its run of closes at near eight-year highs. That is further confirmation of the ETF’s breakout, one that has been brewing for a while. 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 18.3% where the ETF closed Wednesday. 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.
Bolstering the outlook for bank stocks, the strong May employment numbers fueled speculation that the Fed would hike rates this year in response to the improving economic outlook. [Look to Bank ETFs in a Rising Rate Environment]
KRE captured $243.4 million in new investments last month while the SPDR S&P Bank ETF (NYSEArca: KBE) gained $89.5 million in fresh capital. KBE is not a dedicated regional bank ETF, but the fund allocates 77.5% of its weight to regional banks. Investors have continued flocking to KRE this month as the fund added $159 million in new assets from June 1 to June 9. [Investors Flocked to These Sector ETFs in May]
As for KRE’s technical condition, the ETF is breaking out of a five-year channel, which is significant.
Chart Courtesy: Kimble Charting Solutions