On this episode of the “ETF of the Week” podcast, VettaFi’s Head of Research Todd Rosenbluth talks about the SPDR S&P Regional Banking ETF (KRE) with Money Life host Chuck Jaffe. The pair discussed use cases for the ETF as well as its outlook.
ETF of the Week
Chuck Jaffe: One fund, on point for today. The expert to talk about it. This is the ETF of the Week.
Welcome to the ETF of the Week, where we get the latest take from Todd Rosenbluth, the head of research at VettaFi. If you check out VettaFi.com, you will find all the tools you need to be a savvier, smarter ETF investor, and to get more details on the new, newsworthy, trending, and timely ETFs that we talk about here. Todd Rosenbluth, it’s great to chat with you again.
Todd Rosenbluth: It’s great to be back with you, Chuck.
Jaffe: Your ETF of the week is?
Rosenbluth: It is the SPDR S&P Regional Banking ETF (KRE).
Jaffe: Money in the bank. In this case, regional banks. It is the SPDR S&P Regional Banking ETF. Now I’ve got a lot of questions about the timing of this pick. That’s because we always say, trending and timely picks. Basically , as of Election Day, this fund was trading about 8% below where it’s trading as you and I record this. So, is this about the move it made post election? Or about the move you expect it to make “well” post election?
Rosenbluth: We think regional banking has been in favor. This ETF has been very popular since the election. The Trump administration and Republicans are more likely to be supportive of deregulation in the financial services industry. That’s a good thing for regional banks that are a highly regulated group of companies. The election is likely to be a positive if you want your taxes and corporate taxes to be lower. And banks, of course, pay taxes.
Smaller companies tend to be disproportionately impacted by taxes from their overall profitability standpoint. They don’t have that same scale. So, this ETF is equally weighted. And it has more small-cap exposure than some of its financial services peers. So, we think the trend is going to be favorable. We think investors certainly think it’s going to be favorable. And we wanted to dive into what you get and why it may be under consideration.
Regional Banking ETF KRE
Jaffe: I want to point out that, as of late, you’ve been talking a lot about active ETFs. But as you point out, this is equally weighted. So why not a more active methodology in the regional banking space?
Rosenbluth: First of all, I guess there really isn’t in the ETF space. There are a couple of active broader financial services ETFs. Davis comes to mind as having one of them. But what this ETF does is have exposure to many U.S. regional banks large, medium, and small in size. They treat them equally. So, they all are roughly 1%, give or take, of the overall portfolio until it gets rebalanced and then it comes back to that 1% level. It’ll deviate a little bit from that.
This is just a simple way, if you have exposure to the financial services sector, through an ETF like XLF. That’s also a State Street ETF. It’s the Financial Select Sector SPDR ETF. It can bolt on nicely because regional banks are part of that. If you have no exposure to the sector other than through a broadly diversified S&P 500 ETF, this can be a nice, risk-on tilt.
Regional banks can make sense, and an index-based approach can work very well for many investors.
Jaffe: You point out a risk-on tilt when it comes to this. How much of a portfolio — and I recognize you don’t make specific recommendations — but if somebody is looking to make a tilt, you put a pittance in. You don’t really get much lean. So, how much of a portfolio or how much of somebody’s equity portion do you look at something like this to be, to get that tilt that you want?
Rosenbluth: So, I’m a big believer. I think listeners and watchers have gotten the sense in a broadly diversified portfolio using broadly diversified ETFs as a core and then using some ETFs to be able to complement that. Let’s break down some of the numbers here. I didn’t cross-check this, but financials as a sector is a low-teens I believe percentage of the S&P 500. So, it’s not as big as information technology. It’s certainly not as small as utilities or real estate. It’s somewhere in the middle.
Banks are roughly a third, I believe, maybe a little bit less than that, maybe 30% of the financial sector. It’s not the largest of those industry groups, and regional banks are even smaller.
Regional Banking
So, you have some exposure to regional banks today. That’s a long way of saying it. If you believe that regional banks are going to be an outperformer, you want to have some meaningful exposure to the industry, and maybe pick a couple of sectors that you think can outperform the broader market, whether it’s an industry ETF like this regional banking ETF or it’s more thematic in nature. That’s a great way to complement an existing broadly diversified, perhaps S&P 500-based strategy.
Jaffe: In terms of this being a risk-on tilt, what would make you at some point go risk-off? Will it be that some other sector or some other weighted part of the S&P has heated up, and you want to lean in that direction? Or will there be a sign because it’s easy to buy something and say, this is a good time to add it. But if you’re going to say it’s a good time to add it, you kind of also want to have an understanding going in of what would be a good time to subtract it.
Rosenbluth: I think the case for regional banks is quite strong in the initial months of the Republican administration and Republicans perhaps having control of both houses of Congress to enact the tax policy that I think they’re likely to put forward based on what their campaigns have said.
If we don’t see taxes come into focus and we don’t see deregulation become in focus, then this industry doesn’t have the same investment merit.
I would probably be watching this industry in the initial months. Obviously, Trump doesn’t become president on January 1. It’s a little bit after that. I think the initial months of 2025 will help to see if this industry group is actually doing what you want it to do and is it benefiting from stronger fundamentals. And if that’s not the case, if you decided to take this risk on, you might want to take it off and look elsewhere.
Again, this is an idea. We do this on a weekly basis. There’s no way people should own 50 different ETFs that we talk about within a given year. This is an idea for people to consider and where the money is already started to flow in. We wanted to dive in a little more closely.
Jaffe: And that’s the other side. The money has started to flow in, but you think this is worth that look, right now. Again, you’re saying, let’s see how it plays out when we get the administration change. But prior to the change in administration, etc., given the way the market has reacted to the election, this is something you want that risk-on tilt now.
Rosenbluth: Right. The stock market, and thus the ETFs that are tied to the stock market, are forward-looking in nature. We’re not buying what is likely to do well from a profitability standpoint in November; the market looks at least six months forward. ETF investors should look six months forward. Let’s see where we are in three to six months.
I may be happy to be back here and come back with a different SPDR S&P industry group that we think is likely to do better than the regional banks. But right now, the regional banking ETF tied to State Street is in focus right now.
Jaffe: And that’s why KRE, the SPDR S&P Regional Banking ETF, is the ETF of the Week from Todd Rosenbluth at VettaFi. Todd, great stuff. We’ll see you again next week.
Rosenbluth: Great to be back with you, Chuck.
Jaffe: The ETF of the Week is a joint production of Verify and Money Life with Chuck Jaffe. And yes, I am Chuck Jaffe. You can learn all about my hour-long weekday show by going to Moneylifeshow.com, or by searching for wherever you find great podcasts.
And if you’re searching for great information on exchange-traded funds, well, you want to look no further than VettaFi.com, where they have all the tools you need to make yourself a better investor and a more informed investor in ETFs. They’re on X at Vetta_Fi. Todd Rosenbluth, the head of research at VettaFi, my guest on ETF of the Week, he’s on X too, he is @ToddRosenbluth.
The ETF of the Week is here for you every Thursday. Follow along on your favorite podcast app to make sure you don’t miss any of our episodes. And we’ll introduce you to another great ETF next week. Until then, happy investing, everybody.
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