With Treasury yields continuing to flirt with the important 3% area, some rate-sensitive asset classes are benefiting, including regional bank stocks and the related exchange traded funds. The SPDR S&P Regional Banking ETF (NYSEArca: KRE), the largest regional bank exchange traded fund, is up more than 4% over the past week.
Rising interest rates are seen helping U.S. banks and the related ETFs. The Federal Reserve is expected to raise interest rates again this year after doing so three times in 2017. The financial services sector could be working its way into a period of long-term out-performance. The recent rally in the sector could still be in the early innings, according to some market observers.
“Like the broader market, bank stocks have been mired in a choppy trading range this year. On a positive note, yesterday’s rally was powerful enough to punch through overhead resistance, which brings the upper half of its multimonth range into play,” reports InvestorPlace. “Further strength in bond yields could help propel KRE back to its 52-week high of $65 over the coming months.”
Near-Term View for Banks
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.
Related: Are Banks Fundamentals Still Strong?
“With an implied volatility rank of 25%, KRE options contracts can be scooped up on the cheap. A long vertical call spread is worth a shot. Buy the June $61/$65 bull call spread for around $1.90. The initial cost is the max loss and will be forfeited if KRE sits below $61 at expiration. The max gain is $3.10 and will be captured if KRE rises above $65 by expiration,” according to InvestorPlace.
Risk-tolerant 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 financial sector, visit our financial category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.