Not All ETFs Are Created Equal

With the plethora of exchange traded fund options to choose from, investors should carefully look under the hood of a prospective ETF investment, even if two sound similar and track comparable strategies.

Since the November elections, bank stocks have outperformed due to a combination of favorable factors, like renewed enthusiasm for higher interest rates, optimism over corporate tax reform, reduced regulatory burdens and improved earnings growth.

“Despite the large rally, there are differences in performance among the banks, based on the size of the banking institution and the type of services offered,” according to Keefe, Bryette & Woods. “Investors using associated exchange-trade fund (ETF) products to either make positions or hedge equity exposures benefit from using precise bank indices. These indices also provide the most relevant bank benchmarks for comparative purposes.”

When looking for exposure to bank stocks, ETF investors have a number of are a number options to choose from, including the PowerShares KBW Bank Portfolio (NYSEArca: KBWB), SPDR S&P Bank ETF (NYSEArca: KBE), PowerShares KBW Regional Bank Portfolio (NYSEArca: KBWR) and SPDR S&P Regional Banking ETF (NYSEArca: KRE). These options appear to be two decent plays in the current environment where President Donald Trump has laid out plans to rollback the Dodd-Frank financial-overhaul law, potentially freeing up the firms to achieve more aggressive growth targets.

However, investors should not confuse the bank ETFs with regional bank ETFs as the two categories provide very different exposures. Specifically, universal and large regional banks are most impacted by industry regulation and Federal Reserve policy, and they are exposed to higher associated regulatory costs and lower merger and acquisition opportunities. On the other hand, regional banks provide investors with more geographical exposure and M&A opportunities.