Bullish Catalysts For Regional Bank ETFs

While the market fell almost 2 percent on Friday, the regional bank sector bucked the trend as it was the only sector to finish in the green.

The strength can be attributed to two major factors, Fed stress tests and rising interest rates. The Fed revealed that all 31 of the largest banks have enough capital to weather losses in the event of an economic downturn - the first time every bank has passed the central bank's annual stress tests.

The largest U.S.-based banks "continue to build their capital levels and to strengthen their ability to lend to households and businesses during a period marked by severe recession and financial market volatility," the Fed said on Friday.

An interest rate hike by the Fed would lead to the regional banks being able to charge more to lend money, thus increasing their bottom line margins.

Some regional bank ETFs affected by the recent developments include the following:

-The iShares U.S. Regional Banks ETF IAT, which consists of 53 small and mid-sized domestic regional U.S. banks. Top holdings include U.S. Bancorp USB with a large weighting of 19.8 percent, PNC Financial Services Group Inc. PNC with 12.2 percent and BB&T Corp BBT with 6.9 percent.

IAT is up 2 percent over the last 12 months and up 5 percent over the last six months. The ETF came close to breaking out to its highest level since 2008, but failed to follow through. A close above $35.81 would be a major breakout and Buy signal. The ETF has an expense ratio of 0.43 percent.

-The SPDR S&P Regional Bank ETF KRE, which is made up of 86 regional banks with diverse weightings. The top three holdings all have a weighting of 1.6 percent, and they include BankUnited Inc BKU, City National Corp CYN and First Republic Corp FRC.

KRE is down 2 percent over the last 12 months and up 4 percent over the last six months. The breakout level on KRE is $42.79, and the ETF has an expense ratio of 0.35 percent.

-The PowerShares KWB Regional Banking Portfolio ETF KBWR, which provides investors exposure to 50 U.S.-based regional banks. The top holdings include SVB Financial Corp SIVB with a 4 percent holding, Umpqua Holdings Corp UMPQ making up 3.6 percent and First Niagara Financial Group Inc. FNFG with 3.2 percent.

KBWR is down 1 percent over the last 12 months and up 5 percent over the last six months. The breakout level for KBWR is $41.52, and the ETF has an expense ratio of 0.35 percent.