President-elect Donald Trump tapped Steven Mnuchin for the position of Treasury Secretary, adding to speculation of deregulation in the financial industry and strengthening the outlook for U.S. small-capitalization bank related exchange traded funds.
Smaller banks could find relief as the Trump administration rolls back strict regulatory reforms imposed on the financial sector. Mnuchin previously stated that his top regulatory priority is to “strip back parts of Dodd-Frank,” arguing that the law is too complicated and restricts lending, reports Aaron Back for the Wall Street Journal.
Dodd-Frank imposed a number of restrictions on the financial sector, and industry observers contended that the new regulations forced on an unequally high burden on smaller banks, which has contributed to slow returns among mid- to small-sized banks.
Mnuchin has been quoted in stating that lending by regional banks is “the engine of growth to small- and medium-sized businesses.”
[related_stories]Mnuchin previously served on the board of CIT, a midsized lender, and my have personal insight into the harsher realities of operating a smaller bank under Dodd-Frank. While he is likely to avoid any appearance of conflict of interest, some believe that his experience at CIT will make him more aware of the struggles of small and midsized institutions.
Consequently, if the government does decide to roll back some of the policies under Dodd-Frank, the smaller bank segment may enjoy a quicker recovery. Potential investors seeking to capitalize on the windfall may consider a number of ETFs that target smaller banks.
For example, the First Trust NASDAQ ABA Community Bank Index Fund (NasdaqGM: QABA), PowerShares S&P SmallCap Financials Portfolio (NYSEArca: PSCF) and PowerShares KBW Regional Bank Portfolio (NYSEArca: KBWR) include large tilts toward small- and micro-cap bank stocks.
The larger and more popular SPDR S&P Bank ETF (NYSEArca: KBE) and SPDR S&P Regional Banking ETF (NYSEArca: KRE) also include large tilts toward the small and midsized segments, along with some large-cap exposure. KBE and KRE equally weight their component holdings and have a larger weights toward mid-caps, along with large-caps.
For more information on bank stocks, visit our financial category.