Regional banks also trade at higher valuation multiples. At the end of January, regional banks showed a premium of 39% to universals and 17% to large regionals. KBWB is trading at a 14.2 P/E while KBWR is trading at a 18.1 P/E.

KBWB tracks the KBW Nasdaq Bank Index while KBWR follows the KBW Nasdaq Regional Banking Index. According to Keefe, Bryette & Woods, the two underlying Bank and Regional Banking indices replicate investable large-cap and regional-bank segments, respectively, with no overlap between the two indices.

KBE follows the S&P Bank Select Industry Index while KRE reflects the performance of the S&P Regional Banks Select Industry Index. Keefe, Bryette & Woods analysts pointed out that about 89% of KRE’s weighting comes from KBE’s underlying index. Additionally, the two indices trade at similar fundamentals. KBE has a 15.7 P/E and KRE shows a 16.6 P/E.

“This significant membership overlap erodes differentiated bank performance,” Keefe, Bryette & Woods analysts warned, adding that KBE and KRE’s underlying indices are nearly identical with a 0.98 correlation, compared to KBWB and KBWR’s underling indices’ correlation of 0.90.

For ETF investors, it is important to take a close look at the underlying holdings and indices to get a better sense of what you are investing in.

KBWR and KBWB’s underlying indices “are more narrowly defined than the S&P bank indices, with tighter constituent market-cap ranges and smaller constituent groups, representative of their respective capitalization focus,” Keefe, Bryette & Woods analysts added.