The SPDR S&P Regional Banking ETF (NYSEArca: KRE), the largest regional bank exchange traded fund, is up more than 10% year-to-date and some market observers believe regional bank stocks offer more upside.
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.
“It’s the perfect culmination of conditions for the small banks. Those factors include a strong U.S. economy, a rising rates environment that is widening credit spreads, and less financial regulation,” said Michael Bapis, partner and managing director at the Bapis Group at HighTower Advisors, in an interview with CNBC.
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.