A Cloudy Near-Term Outlook for Regional Bank ETFs

The financial services sector, the second-largest sector weight in the S&P 500, has been under pressure since the Federal Reserve unveiled its first interest rate increase of 2017 earlier this week. Even with that rate hike, rate-sensitive regional bank stocks and exchange traded funds have been faltering.

For example, the SPDR S&P Regional Banking ETF (NYSEArca: KRE), the largest regional bank ETF, dropped 6.7% last week. Higher interest rates would help widen the difference between what banks charge on loans and pay on deposits, which would boost earnings for the financial sector. Regional banks are among the stocks most positively correlated to rising interest rates because higher rates improve net interest margins.

To that end, the Fed’s most recent rate increase, its third in the past 15 months, resulted in disappointment for KRE and regional bank stocks.

“From a price analysis perspective (chart reading), regional banking stocks are (over)due for a correction. Uncoincidentally, that correction started as the sector reached 60 points in the KRE ETF (regional banking stocks), after the sector doubled,” according to ETF Daily News.