Market Overview

S&P Bullish On A Pair Of Regional Banking ETFs

Ahead of a key earnings report from Dow component J.P. Morgan Chase (NYSE: JPM) before the bell Friday, it's worth noting that big bank stocks have acted better to start 2012 than they did for basically all of 2011.

Granted, year-to-date at this point means eight trading days, but Bank of America (NYSE: BAC), Citigroup (NYSE: C) and J.P. Morgan Chase are all showing double-digit returns and the Financial Select Sector SPDR is no slouch either with a gain of over 5% to start 2012.

Still, XLF, the largest ETF tracking the major U.S. banks, is down more than 15% in the past year and that performance significantly lags the returns offered by two regional bank ETFs S&P Capital IQ rates as Overweight.

The iShares Dow Jones US Regional Banks ETF (NYSE: IAT) is down less than 10% in the past year while the SPDR S&P Regional Banking ETF (NYSE: KRE) is almost positive over the same time.

"This year looks much brighter for banks. The U.S. has not slipped back into recession, and employment and manufacturing statistics are showing strength. Japan appears to be recovering well from last year's events, and Asian tech and auto supply chains are up to speed supplying U.S. factories and consumers. Stability is evident almost everywhere, in sharp contrast to last year. The "green shoots" of 2009, which promised so much and delivered so little, may now be for real. That would provide solid support for bank lending, interest rate spreads and capital cushions. Also, the U.S. federal government tug-of-war between a president who was elected with a large mandate in 2008 and a Congress elected in 2010 to stop presidential over-reach, has settled into what seems like an armed standoff, not a good situation, but at least one that is stable.

"The only thing, in our view, that could pose a real problem for U.S. banks this year would be another eruption of the euro zone, in the form of a large bank requiring emergency assistance, investors refusing to recapitalize banks, a refusal of larger European countries to contribute to bailout packages, and denial of smaller European countries of the extent of their problems. By mid-2012, European banks are required to raise large amounts of outside equity capital to bolster their capital levels, and investors so far have been reluctant. Currently, the euro zone is stable and quiet, allowing investors to focus on the U.S.," S&P analyst Erik Oja said in a note.

With nearly $101 million in assets under management and an expense ratio of 0.47%, IAT is home to 62 stocks. Investors should note over 40% of the ETF's weight is concentrated in three stocks: U.S. Bancorp (NYSE: USB), PNC Financial (NYSE: PNC) and BB&T (NYSE: BBT).

KRE has over $857 million in AUM and fees of 0.35%. The ETF offers exposure to roughly 70 stocks and some of its top-10 holdings include SunTrust (NYSE: STI), Zions (Nasdaq: ZION) and Regions Financial (NYSE: RF).

Posted-In: Earnings Long Ideas News Sector ETFs Short Ideas Intraday Update Markets Trading Ideas

 

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