Narrow Financials Exposure to Regional Banks, P&C for Better Returns

Financials have held up better than the broader market this year, but investors can be even more tactical with their exposure to capture the best opportunities in the sector.  

Year to date as of November 21, the S&P 500 Index has declined 15.9% while the S&P 500 Financials sector has declined just 7.8%. But looking even more narrowly, there are sub-sectors within financials that are holding up even better. 

“Property and casualty is actually positive for the year, up 7.5%,” Rene Reyna, head of thematic & specialty product strategy at Invesco, told VettaFi. “Looking at regional banks, they’re down just under 3% as of Friday’s close. As you narrow down this base, we have seen some resiliency.” 

Reyna said these areas are holding up better because regional banks are largely insulated from the challenges that larger banks are contending with. At larger banks — such as J.P. Morgan and Wells Fargo — banking fees are substantially down, M&A advisory fees are down, and equity and debt underwriting is down.  

“We look on the other side of the spectrum, at some of these more regional banks, and they’re somewhat insulated from some of those businesses by nature, just based on the type of services they provide,” Reyna said. 

Regional banks are also seeing positive loan growth and increased deposits. Reyna pointed to the U.S. government-issued stimulus checks, which resulted in about $3 trillion in deposits that didn’t exist previously. This has resulted in regional banks being very well capitalized.  

“Broadly speaking, net interest income and net interest margins have been increasing throughout most of this year,” Reyna said. 

Investors can gain exposure to regional banks and property and casualty with the Invesco KBW Regional Banking ETF (KBWR) and the Invesco KBW Property & Casualty ETF (KBWP), which each charge 35 basis points. 

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