Looking Under the Hood of Bank ETFs | ETF Trends

One trend that has been happening lately in the ETF space is bigger banks have been out performing the smaller ones. This has resulted in ETFs like the Financial SPDR ETF (XLF) and the SPDR S&P Regional Bank ETF (KRE) seeing significant gains of 12-17%.

Diversification of their revenue streams is one factor that helps the larger banks edge out smaller, regional bank competitors.

“So the larger companies, which tend to be in more of the market cap-weighted products like XLF, which is the Financial Select SPDR, or the iShares Regional Bank ETF, you’re going to have more diversification of the revenue stream. It’s not as dependent upon on loans and loan growth, but broader areas of revenue that you’re going to have asset management, wealth management, trading in capital markets, and so that diversification is going to help in a lower for longer interest-rate environment,” said Todd Rosenbluth, CFRA on CNBC.

Another factor that may be helpful for a larger banks to find success is having a lower interest-rate environment say experts

“The bigger banks have a much deeper capital market structure that they can leverage for revenue that the regional banks don’t have. So this persistent low rate environment is going to favor the bigger banks,” said Chris Hempstead, former head of ETF sales for Deutsche Bank.

It’s interesting to note that some of the regional bank ETFs like iShares U.S. Regional Banks ETF (IAT) are really made up of only a few names, such as Bancorp, PNC, and SunTrust.

“It highlights how important it is to look inside the portfolio,” said Rosenbluth. “So that portfolio versus the other product from State Street, KRE, the regional bank-oriented ETF, which is equally-weighted. Big difference in the number of holdings, big difference in the size of those holdings. So roughly 2 or 3% of the assets in those large or regional banks as opposed to 8% or 9%. You really got a look under the hood with ETFs.”

Watch the CNBC segment ‘Here are the ETFs to watch heading into Big Bank earnings season’ here:

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