Fed Could Provide Small Bank ETFs a Helping Hand

Markets ETF Trends

Regional and community bank-related exchange traded funds could outperform in the financial space as Federal Reserve Chairwoman Janet Yellen expresses calls for greater accountability on Wall Street but potential relief for smaller banks.

Continue Reading Below

“With respect to small and medium-sized banks, we must build on the steps we have already taken to ensure that they do not face undue regulatory burdens,” Yellen said in testimony prepared for a House Financial Services Committee hearing Wednesday.

Yellen glossed over a number of potential tweaks to community bank rules that have been proposed or are under consideration, such as changing the capital rules, reports Ryan Tracy for the Wall Street Journal.

The Fed and other agencies “are actively considering proposals to simplify regulatory capital requirements for community banks,” Yellen said.

On the other hand, Yellen reiterated the Fed’s intention to enact greater capital requirements on the largest U.S. banks, which officials believe still pose a threat to the economy if they were revisit another financial downturn event.

Continue Reading Below

SEE MORE: ETFs That Welcome a Fed Rate Hike

Yellen said the proposal “would result in a significant aggregate increase in capital requirements” for the largest financial institutions, reports Nathan Bomey for USA Today.

Consequently, with the threat of further regulation on big banks and easing requirements on smaller companies, the small-cap banking industry and sector-related ETFs could outperform.

SEE MORE: Small-Cap Bank ETFs Could Win This Election Season

Investors interested in the small-cap banking sector have a number of options available. For instance, the First Trust NASDAQ ABA Community Bank Index Fund (NasdaqGM: QABA) tracks a group of community banks, including top components like Signature Bank 3.3%, East West Bancorp 2.8% and PacWest Bancorp 2.7%. The PowerShares S&P SmallCap Financials Portfolio (NYSEArca: PSCF) targets smaller financial companies from the broader S&P SmallCap 600 Index. The  PowerShares KBW Regional Bank Portfolio (NYSEArca: KBWR) targets regional banks.

QABA market-cap weights include small-cap 47.3% and micro-cap 31.7%. PSCF holds small-cap 71.1% and micro-cap 27.4%. KBWR includes small-cap 67.1% and micro-cap 4.7%.

For more information on the financials sector, visit our financial category.

This article was provided by our partners at ETFTrends.