Regional Bank ETF Flows Didn't Predict ZIRP Continuation

The Federal Reserve's decision Thursday to maintain its zero interest rate policy (ZIRP), not surprisingly, dealt a blow to regional bank stocks and the corresponding exchange traded funds.

However, recent flows data for ETFs such as the SPDR KBW Regional Banking (ETF) (NYSE:KRE), the largest regional bank ETF, and the SPDR KBW Bank (ETF) (NYSE:KBE) indicate many investors in these ETFs were expecting the Fed to cooperate and raise rates.

Two Weeks And Substantial Losses

Since the start of September through Wednesday, September 16, KRE and KBE lost $43.8 million and $11.2 million, respectively, in assets. One could say, Hey, some investors were pulling out of these in advance of the Fed meeting. Literally, that is true, but a combined $55 million in departures from these rate-sensitive ETFs is a blip on the radar when acknowledging KBE came into Thursday with $2.83 billion in assets under management, while KRE had $2.41 billion in assets, according to State Street data.

Among State Street's extensive lineup of sector and industry ETF, few if any are as positively correlated to rising 10-year Treasury yields as is KRE. KBE probably is not far behind.

Though it is not a dedicated regional bank ETF like KRE, KBE does allocated 77.5 percent of its weight to regional bank stocks.

What makes the lack of outflows from KRE and KBE prior to the Fed meeting all the more interesting is that investors, as Benzinga reported in advance of the Fed announcement, were hurrying to depart rate-sensitive utilities ETFs. If ETFs could express human emotions, it is safe to say the Utilities SPDR (ETF) (NYSE:XLU) and friends were cheering for ZIRP to continue as much as KRE and KBE were rooting for it to end.

The Utilities Factor

Coming into Thursday, XLU had been stung by nearly $550 million in month-to-date outflows.

Adding to the intrigue surrounding KBE and KRE's slack showings Thursday is that historical data confirm that the financial services sector is a dud following a rate hike. In nine of the 12 months following Fed liftoff, financials were the worst or second-worst performing sector, according to Bank of America Merrill Lynch.

However, the Select Sector Financial Slct Str SPDR Fd (NYSE:XLF) fell more than 1 percent Thursday.

Traders looking to add some excitement to their bearish view of regional bank stocks might consider the newly minted Direxion Daily Regional Banks Bear 3X Shares (NYSE: WDRW). The Direxion Daily Regional Banks Bear 3X Shares is designed to deliver triple the daily inverse performance of the Solactive US Regional Banks Total Return Index. WDRW debuted a month ago.

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