Should You Follow Cramer Into Regional Bank ETFs?

by: Gary Gordon

Broad-based stock and bond ETFs have struggled throughout the final month of the second quarter. However, some folks may have found a bit of refuge in the banking sector.

Can Banks Maintain Their Mojo?
Approx 1 Month %
First Trust NASDAQ Community Bank (NASDAQ:QABA) 2.2%
SPDR KBW Regional Banking (NYSEARCA:KRE) 2.2%
iShares DJ Regional Bank (NYSEARCA:IAT) 1.9%
PowerShares KBW Regional Banking (NASDAQ:KBWR) 1.8%
iShares Total US Bond (NYSEARCA:AGG) -3.1%
SPDR S&P 500 Trust (NYSEARCA:SPY) -3.6%

The momentum play in banking appears rational. Yields on long-dated bond maturities have been skyrocketing while shorter-term maturities have not moved quite so dramatically. When the “yield curve” steepens in this manner, one might assume that banks will profit from the larger spread between short- and long-term interest rates - that is, they may borrow at ultra-low rates as well as lend out at much higher rates to businesses and consumers.

Media personality Jim Cramer is already touting the technical strength of funds like KBW Regional Banking (KRE) and SPDR KBW Bank (KBE). Looking at the current yield curve while ignoring future economic probabilities, however, may bite the momentum player in the backside.

If economic data sours in the months ahead (and I believe that it will), the markets will embrace the notion that the Federal Reserve cannot justify tapering their easing program. Does anyone really believe that the economy is currently capable of standing on its own? You can almost hear Howard Cosell saying, “Down go treasury yields! Down go treasury yields!”

By way of review, Europe’s endless recession shows little signs of improvement: higher yields in the region are already hindering the recovery hopes of French, Italian and Spanish citizens. China’s manufacturing segment is contracting at the same time that its leaders have responsibly elected to refrain from easing with reckless abandon. What’s more, corporate earnings may already be in trouble as negative pre-announcements by S&P 500 corporations are at their highest levels in 17 years (N/P is approximately 7.0).

Personally, I would hold off on over-weighting the financial sector. The easy money via the steepening of the yield curve has likely been “banked” already. The time to overweight financials on the steepening theme was at the start of May, rather than at the end of June, as evidenced by iPath U.S. Treasury Steepener ETN (NASDAQ:STPP).

In my estimation, there will be a better opportunity to invest in equities that come in a wide variety of shapes and sizes. Nevertheless, if you’re going to dollar cost average into stocks at this moment, dividend growth stocks and “non-utility non-cyclicals” are better for a summertime of 1%-2% price swings. Vanguard Dividend Growth (NYSEARCA:VIG), Market Vectors Retail (NYSEARCA:RTH) and Market Vectors Pharmaceuticals (NYSEARCA:PPH) are all on my radar screen.

Meanwhile, a “contrarian trader” might even be so bold as to think in terms of the yield curve flattening due to increasing risks of recession. He/she might choose to investigate iPath U.S. Treasury Flattener ETN (NASDAQ:FLAT). It may not be realistic for my conservative clients, but active traders may choose to play the “contrary-to-popular-wisdom” angle.

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.