Reviewing a Favored Rising Rates ETF

Like other financial services exchange traded funds, the SPDR S&P Regional Banking ETF (NYSEArca: KRE), the largest regional bank ETF, is struggling this year with a year-to-date loss of nearly 15%.

That is the tale of the tape for KRE and other sector ETFs that are positively correlated to rising interest rates. As 10-year Treasury yields have come in as investors have favored safe-haven assets early in the new years, assets and sectors positively levered to higher interest rates have been punished.

Contributing to the weakness in the bank sector, traders may have been unwinding bullish bets in the run-up to the Federal Reserve’s first rate hike in December, reports Stephen Foley for the Financial Times. Investors hoped that higher rates would allow banks to capitalize on wider net interest margin – the difference between deposit rates and lending rates, but the global economic uncertainty has weighed on prospects for a quick Fed rate hike schedule.

While U.S. banks have some exposure to over-leveraged oil companies, the level of exposure to the distress energy industry is not up to the scale of the U.S. housing market that triggered the 2008 run. Nevertheless, market observers are weighing on the oil outlook in the recent earnings season.

KRE’s sensitivity to interest rates is well known. The ETF rose just 2% in 2014 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.