Why Regional Banking ETFs Are Leading the Pack

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 |  Includes: IAT, KRE, RKH
by: Tom Lydon

ETFs focused on regional banking shares have tended to outperform the broad sector. Why is this area of the troubled financial system coming out ahead?

Overall, there is speculation that smaller lenders’ credit losses are easing and that they will be less affected by potential financial regulations, John Spence for The Wall Street Journal says. This may explain why regional banking shares are performing well, compared to the rest of the financial sector.

The SPDR KBW Regional Banking (NYSEArca: KRE) is up 11.9% so far this year, while the S&P 500 is down 1.6%. Regional banks are also trouncing the broader financial sector: in the last three months, KRE is up 17.6%, while the Financial Select Sector SPDR (NYSEArca: XLF) is down 1.4%.

Aside from benefiting from Obama’s calls for new policies toward larger banks, regional banks have to other things going for them:

  • Stronger earnings and outlook. KeyCorp (NYSE: KEY) and Fifth Third Bancorp (NASDAQ: FITB) posted strong earnings, while SunTrust (NYSE: STI) got a nod from Goldman Sachs analysts, who called it their “best idea” in the sector.
  • Less exposure. Regional banks had less exposure to subprime mortgages and other risky securities relative to big banks, which saw their stocks crumble in the financial crisis. Be cautious, though, because regional banks aren’t out of the woods. High unemployment could dog the sector and ETFs and consumers struggle to pay down credit card debt.
  • SPDR KBW Regional Banking (NYSEArca: KRE)
  • Regional Bank HOLDRs (NYSEArca: RKH)
  • iShares Dow Jones U.S. Regional Banks (NYSEArca: IAT)