Watching Regional Bank ETFs if Interest Rates Rise

This article was originally published on ETFTrends.com.

The SPDR S&P Regional Banking ETF (NYSEArca: KRE), the largest regional bank exchange traded fund, is up more than 10% year-to-date and some market observers believe regional bank stocks offer more upside.

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.

“It's the perfect culmination of conditions for the small banks. Those factors include a strong U.S. economy, a rising rates environment that is widening credit spreads, and less financial regulation,” said Michael Bapis, partner and managing director at the Bapis Group at HighTower Advisors, in an interview with CNBC.

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.

The recently passed tax reform legislation could also be a boon for regional banks.

“It could also have indirect benefits for the sector. Expected stimulus from the changes to the tax code could speed growth in the U.S. economy, giving a lift to lending activity. Higher economic growth should then encourage the Federal Reserve to raise the fed funds rate at a faster pace, pushing banks to increase their own interest rates,” according to CNBC.

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.