Market Overview

Regional Bank ETFs Your Broker Forgot to Mention

In case you missed it, regional bank stocks and ETFs have recently been stellar performers. The SPDR S&P Regional Banking ETF (NYSE: KRE) is the king among regional bank ETFs.

Recent inflows to KRE highlight as much as. At the end of May, the ETF had $1.5 billion in assets under management, but heading into the start of trading Monday, that number had swelled to nearly $2 billion.

Those inflows combined with KRE's bullish performance, the ETF is up 9.5 percent in the past month, indicate that investors have been embracing regional banks as plays on rising interest rates and that the stocks have been delivering. Net interest margin, or the spread between the average yield on loans and securities investments and a bank's borrowing deposits costs, has pressured earnings power for regional banks, but a steepening yield curve could mitigate further NIM downside, according to ETF Trends.

With second-quarter earnings season here and expectations in place that the financial services sector will be one of just a few to provide noticeable upside surprises, investors may want to consider KRE or its rivals sooner rather than later. Here is a look at some unheralded alternatives to KRE.

iShares U.S. Regional Banks ETF (NYSE: IAT)
While KRE is more of an equal-weight ETF with healthy allocations to true regional banks, IAT is a play on super regional names such as US Bancorp (NYSE: USB), PNC Financial (NYSE: PNC) BB&T (NYSE: BBT) and M&T Bank (NYSE: MTB). Overall, IAT is not as big as KRE either by assets ($458 million) or holdings (58 compared to 79 in KRE), but IAT is no slouch in terms of returns.

The ETF is up 7.3 percent in the past month and has already traded twice its average daily volume as of this writing on Monday. Here is a hidden advantage of IAT: It can help ordinary investors attempt their best Warren Buffett impressions. Two of the ETF's top-10 holdings, US Bancorp and M&T, are also large holdings at Berkshire Hathaway (NYSE: BRK-A). Those stocks combine for almost 23 percent of IAT's weight.

PowerShares KBW Regional Banking Portfolio (NYSE: KBWR)
Investors looking for a small-cap approach to regional banks should consider the PowerShares KBW Regional Banking Portfolio. KBWR's 50 holdings have an average market value of $1.85 billion and 61.1 percent of those names are considered small-cap value names. The ETF holds no large-cap stocks.

With just $26 million in AUM, KBWR is the type of ETF that would be met with size criticism. That is a shame and unwarranted because as is the case with ETFs tracking brokerage houses and investment banks, there are some small ETFs offering big returns with regional banks.

KBWR is one of them as the ETF is up 10.2 percent in the past month. The fund may have more in the way of near-term upside potential because it currently resides below $35, well below its 52-week high of $40.51. Despite its size, KBWR does not trade with wide bid/ask spreads (a penny wide at this writing) and rarely (almost never) sees the mid-point of that spread go noticeably above or below the fund's net asset value, according to PowerShares data.

For The Adventurous
Yes, there really is a leveraged play on regional banks and it is the ProShares Ultra KBW Regional Banking (NYSE: KRU). KRU is designed to deliver twice the daily performance of the KBW Regional Banking Index, the same index tracked by KBWR. KRU has actually done better than that. Over the past three months, KBWR is up 14.1 percent, but KRU is up 32 percent.

Folks are starting to take note of KRU as the ETF is up on more than 17 times the average volume Monday. KRU has a bearish equivalent in the form of the ProShares Short KBW Regional Banking (NYSE: KRS), though KRS is not leveraged.

For more on ETFs, click here.

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