Regional bank exchange traded funds have outperformed in the financial sector over the past year but have recently tripped. Nevertheless, traders may still find an opportunity in this smaller subset of the broader finance industry.
The SPDR S&P Regional Banking ETF (NYSEArca: KRE), the largest regional bank ETF, rose 35.3% over the past year, but it has been stymied this year by the surprisingly dovish Fed, falling off 3.5% year-to-date.
The financial sector has been among the laggards since the financial downturn as falling rates and greater regulation under Dodd-Frank weighed on banks, especially among smaller banks, which have either closed or been acquired.
However, this may be a good time to be a regional bank, Sylvia Jablonski of Direxion said in a note. Bolstering the regional bank outlook, President Donald Trump has promised deregulation and tax reforms, which have also helped the finance sector outperform since the elections.
“Look no further than the President’s recent mention in an interview with Bloomberg that he was considering breaking up the big banks. While the comment momentarily shook the industry’s biggest players – Bank of America, JP Morgan, and Citigroup all saw sudden volatility – it was another in a continuing series of positive sentiments for regional banks,” Jablonski said.
Nevertheless, some warn that deregulation and reforms would likely take years to materialize.
Another headwind may come from the consumer sector, notably waning automobile loans. U.S. light vehicle sales came in below estimates in March and were lower from January and February. Banks have accelerated the number of these types of loans to offset revenue as the mortgage market slumped. Jablonski cautioned that regional banks may suffer if sales and loans continue to fall off.
Opportunistic traders who want capitalize on the short-term volatility have a number of leveraged and inverse ETF options to enhance potential returns. For instance, the Direxion Daily Regional Banks 3x Bull Shares (NYSEArca: DPST) can capitalize on short-term views on further strength in the financial sector, or the Direxion Daily Regional Banks 3x Bear Shares (NYSEArca: WDRW) can express short-term hedge of the opposite.
For more information on the banking sector, visit our financial category.