Despite an upbeat earnings season and low exposure to the current round of economic risks, U.S. bank stocks and sector-related exchange traded funds have underperformed, potentially opening up a buying opportunity for value investors.
Year-to-date, the SPDR S&P Regional Banking ETF (NYSEArca: KRE) fell 12.6%, iShares U.S. Regional Banks ETF (NYSEArca: IAT) dropped 10.9% and PowerShares KBW Regional Bank Portfolio (NYSEArca: KBWR) decreased 9.9%. These regional bank ETFs all include greater tilts toward smaller banks.
Additionally, the SPDR S&P Bank ETF (NYSEArca: KBE) and PowerShares KBW Bank Portfolio (NYSEArca: KBWB) both declined over 12% year-to-date. KBWB follows a market cap-weighted index, which make the index heavy on prominent banking names. KBE, on the other hand, tracks an equal-weight indexing methodology, so the ETF will include a greater tilt toward mid-cap banks.
The underperformance in the banking sector has dragged on the broader financial sector, with the Financial Select Sector SPDR (NYSEArca: XLF), which includes a 35.3% tilt toward banks, down 8.9% year-to-date, compared to the S&P 500’s 5.0% drop.
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.