Interesting Activity In A Regional Bank ETF

Financial services stocks and exchange-traded funds have been struggling this year, and a big part of the reason why comes by way of a surprisingly dovish Federal Reserve. While the Fed boosted interest rates in March, the SPDR S&P Regional Banking ETF KRE, the largest regional bank ETF by assets, is lower by 5.8 percent year to date.

Recent Struggles For KRE

Things have not been much better for KRE in recent weeks. Over the past month, the ETF is off more than 4 percent, perhaps a sign that investors are growing tired of waiting interest rate-affected bounces for regional bank names.

Recent options market data indicate some traders are considering the September $53 calls in KRE, not a particularly ambitious bet considering the ETF closed north of $52 last Friday.

“KRE has not performed well lately, trading as low as $51.08 on an intraday basis on Wednesday of this week [May 31] before bouncing to some degree to present levels just shy of $53 (the strike, not coincidentally of these September calls),” said Street One Financial Vice President Paul Weisbruch in a note out last Friday. “It is very possible that value investors have entered the fray here, and are speculating on a potential recovery in the space between now and September options expiration.”

Regional Banks And Interest Rates

Few if any sectors are as positively correlated to higher interest rates than are regional banks. Higher rates boost net interest margins for regional banks, which can in turn increase profits for these banks.

“KRE is an interesting way to play potential upside in beaten down financials, which is likely what the call buyers are looking at here, since that the fund is by far the largest 'Regional Bank' focused ETF in the U.S. marketplace at north of $3 billion in AUM,” said Weisbruch.

Investors seem to be lacking desire to be involved with KRE, according to recent flows data. For the week ended June 1, KRE lost nearly $117 million in assets, a total surpassed by just nine ETFs. That brings KRE's second-quarter outflows to about $250 million.