Fed Isn't The Only Problem For Regional Bank ETFs

On Monday, 13 exchange-traded funds hit 52-week lows and four, or nearly a third, were financial services funds. Members of that dubious quartet were ETFs with significant exposure to regional banks, an industry that has seen rapidly eroding share prices in recent weeks.

The SPDR KBW Regional Banking (ETF) KRE, the largest regional bank ETF, has tumbled 17.2 percent over the past month, closing Tuesday less than 3 percent above its recently touched 52-week low.

The First Trust NASDAQ ABA Community Bnk Indx Fnd QABA has bled 13 percent over the past month and resides just four percent above its 52-week low. Other regional bank ETFs are sporting similarly dour statistics and less-than-encouraging technical outlooks.

Related Link: What's Really Weighing On Financial Services ETFs

More Than Treasury Yields' Decline

It is not just declining Treasury yields that are hampering interest rate-sensitive regional bank stocks and ETFs. Oil prices are playing a part in these declines, too.

“While major US banks recently disclosed the damage caused to date by their respective exposure to US Energy as they provisioned for bad loans, questions still circle over the mark-to-market standards in the wake of oil’s decade low slump. This has seen short sellers circle banking institutions with regional banks leading the negative sentiment,” said Markit in a new research note.

The research firm pointed out that short interest in Texas-based Cullen/Frost Bankers, Inc. CFR has recently surged and BOK Financial Corp. BOKF, parent company of Bank of Oklahoma, “underestimates credit losses ahead of earnings.” Those stocks are familiar faces in a slew of regional bank ETFs.

“Since the beginning of 2015, average short interest across North American banks has increased by 30 percent, reaching 2 percent of shares outstanding on loan. Regional banks have led the surge forward with the firms that make up the iShares US Regional Banks ETF now seeing 3.5 percent of their shares out on loan, up from 2.5 percent in early 2015,” added Markit.

IAT And USO

Markit noted that the iShares Dow Jones US Reg Banks Ind.(ETF) IAT has recently been tracking the United States Oil Fund LP (ETF) USO. Over the past 90 days, IAT is off 13.1 percent, while USO is lower by 35.1 percent. What is concerning there is that IAT is heavily allocated to super regionals such as U.S. Bancorp USB and PNC Financial Services Group Inc PNC.

IAT's 54 holdings are primarily large-cap stocks whereas other regional bank ETFs tilt more toward mid- and small-cap banks.