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ProShares continues to be one of the most active ETF issuers of 2010, announcing the launch on Thursday of the first inverse and leveraged ETFs offering exposure to regional banks. The Ultra KBW Regional Banking (NYSEARCA:KRU) will seek daily returns equal to 200% of the return on the KBW Regional Banking Index, while the Short KBW Regional Banking (NYSEARCA:KRS) will seek to provide -100% of the return on the same benchmark. The index to which the new ETFs is linked is currently tracked by the SPDR KBW Regional Banking ETF, the largest and most heavily-traded regional bank ETF. This benchmark is an equal-weighted index that consists of about 50 regional banks.

KRU and KRS join a number of existing leveraged and inverse financial ETFs in the ProShares lineup. The Short Financials (NYSEARCA:SEF), Ultra Financials (NYSEARCA:UYG), and UltraShort Financials (NYSEARCA:SKF) are all linked to the more broad-based Dow Jones U.S. Financials Index, a benchmark with a tilt towards big Wall Street banks. “We’re pleased to provide investors with ProShares ETFs on the regional banking sector,” said Michael L. Sapir, Chairman and CEO of ProShare Advisors LLC, ProShares’ investment advisor. “Many investors follow regional banking stocks, and these ETFs provide them with additional tools to act on their views.”

Regional Banks In Focus

Although much of the media coverage of the recent financial crisis focused on multinational institutions such as JP Morgan (NYSE:JPM) and Citi (NYSE:C), regional banks have had their worlds turned upside-down over the last two years as well. The number of bank closures has surged over the last 15 months amidst the credit crunch and general uncertainty in the financial sector. In 2009, 140 banks shut their doors, nearly six times the number that closed the previous year and the highest annual total since 1992 when 181 banks failed. Already this year 50 names have been added to the FDIC’s failed bank list, and analysts expect that number to grow throughout the remainder of 2010.

While most sectors got a lift from the strong recovery effort in 2009, regional banks were among the laggards that lost ground on the year; KRE slid more than 20% in 2009. But despite lingering concerns about the health of lending activity, regional bank ETFs are among the best performers of 2010; KRE has gained about 30% on the year, far outpacing the broad Financial SPDR (NYSEARCA:XLF). Moreover, regional banks ETFs have a tendency to be relatively volatile, an appealing characteristic for short-term investors and a good fit for leveraged and inverse products. Since the beginning of 2009 KRE has gained or lost at least 1% in just over six out of ten trading sessions. It has swung by at least 3% once in every four sessions and by at least 5% once in every ten trading days.

Leveraged Growth

Despite potential hurdles resulting from the SEC’s recent decision to investigate the use of derivatives by ETFs and mutual funds, the leveraged ETF space has seen tremendous growth in 2010. According to the latest data from the National Stock Exchange, almost $500 million flowed into leveraged ETFs in the first quarter (including inverse leveraged ETFs), while inverse ETFs took in about $230 million.

ProShares and Direxion have been very active in the product development area, already launching more than two dozen new products in 2010.

Disclosure: No positions at time of writing.

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Source: ProShares Teams Up With KBW to Launch Inverse, Leveraged Regional Bank ETFs