Large banks with more than $1 trillion in total assets like JP Morgan Chase and Bank of America may typically have their names in lights when looking at the financial sector specifically, but it’s been the regional banks that have been the unsung heroes. With this in mind, traders looking to capitalize on this strength in the regional banking sector can look to the Direxion Daily Regional Bnks Bull 3X ETF (NYSEArca: DPST).
The disparity between the performance of the overall financial sector versus regional banks can be seen in a comparison of charts for the Financial Select Sector SPDR ETF (NYSEArca: XLF) and the SPDR S&P Regional Banking ETF (KRE). In particular, looking at the year-to-date chart comparisons show that regional banks have been outperforming their big brothers in the overall financial sector.
DPST seeks daily investment results equal to 300% of the daily performance of the S&P Regional Banks Select Industry Index. DPST invests in securities comprising the index, ETFs that track the index and other financial instruments that provide daily leveraged exposure to the index or ETFs that track the index. The index is a modified equal-weighted index designed to measure performance of the stocks comprising the S&P Total Market Index that are classified in the GICS regional banks sub-industry.
Specifically looking at DPST versus KRE also reveals that with the extra leverage in place, DPST has effectively outperformed KRE in a year-to-date timeframe. This is also the case in certain timeframes where its trading below its 50-day moving average, but still outperforming KRE.
Rise in Merger Activity Ahead
According to a Harvard study called the “The State and Fate of Community Banking,” new regulations could force smaller, regional banks to merge with other financial firms as the cost to stay independent begins to rise. According to RBC Capital Bank Analyst Gerard Cassidy, this could spur a bevy of mergers within the regional banking industry over the next year or so.
Regional banks may not crack the list of holdings in some financial ETFs, but those that focus specifically on regional banks like DPST could stand to benefit from this wave of impending merger activity.
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