Regional Bank ETFs: Sound Sector Bets

MarketsETF Trends

This article was originally published on ETFTrends.com.

The SPDR S&P Regional Banking ETF (NYSEArca: KRE), the largest regional bank exchange traded fund, has recently given back the bulk of its 2018 gains, but some analysts remain enthusiastic about the prospects for regional banks over the course of this year.

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Rising interest rates are seen helping U.S. banks and the related ETFs. The Federal Reserve is expected to raise interest rates again this year after doing so three times in 2017. The financial services sector could be working its way into a period of long-term out-performance. The recent rally in the sector could still be in the early innings, according to some market observers.

In a recent note Stephens' Terry McEvoy “writes that fundamental trends for the group in the first three months of the year make him more positive ahead of earnings season, which is set to kick off next week,” reports Teresa Rivas for Barron's.

More Good News for Bank ETFs

Higher interest rates would help widen the difference between what banks charge on loans and pay on deposits, which would boost earnings for the financial sector. Regional banks are among the stocks most positively correlated to rising interest rates because higher rates improve net interest margins.

“Commercial loan volume picked up toward the end of the quarter, and although deposit betas—how much banks raise their rates as a percentage of the Federal Reserve's rate increase—likely rose in the quarter, they were largely in line with company forecasts, McEvoy writes,” according to Barron's.

Related: U.S. Sector ETFs for a Rising Rate Environment

KRE and rival regional bank ETFs were banking on higher interest rates to boost their fortunes. Higher interest rates would help widen the difference between what banks charge on loans and pay on deposits, which would boost earnings for the financial sector. Regional banks are among the stocks most positively correlated to rising interest rates because higher rates improve net interest margins

Investors added nearly $895 million to KRE in the first quarter.

Risk-tolerant traders who want capitalize on the short-term volatility have a number of leveraged and inverse ETF options to enhance potential returns. For instance, the Direxion Daily Regional Banks 3x Bull Shares (NYSEArca: DPST) can capitalize on short-term views on further strength in the financial sector, or the Direxion Daily Regional Banks 3x Bear Shares (NYSEArca: WDRW) can express short-term hedge of the opposite.

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

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