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ETF Showdown: Two Regional Bank Funds

January 21, 2011 5:13 pm
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For those that have invested in or traded ETFs for a while, they’ve probably noticed something about ETF names: They can be deceiving.

An ETF’s title can imply an investor is getting exposure to one theme or asset class when the reality is that ETF does something far different.

Well the ETF world has been blessed with the ETF Showdown column and in the wake of a slew of bank earnings this week, this week’s showdown features two regional banking ETFs: The SPDR KBW Regional Banking ETF (NYSE: KRE) and the Regional Bank HOLDRs (AMEX: RKH).

Alright, so it would appear that we’re looking at two ETFs that are plays on regional banks. That much is true with KRE. The ETF holds almost 50 stocks and nowhere to be found is a bank that could be considered super regional or national. No Wells Fargo (NYSE: WFC). No Citigroup (NYSE: C). Nothing like that.

On the other hand, RKH holds almost 20 stocks, but probably only half can be considered true regional banks. Including the likes of Northern Trust (Nasdaq: NTRS) and State Street (NYSE: STT) in a regional banking ETF is almost insulting to an investors intelligence. The fact that Wells Fargo and JPMorgan Chase (NYSE: JPM) account for 43% of RKH’s weight is even worse.

So we now know that KRE is truly regional where as RKH is more national yet there is another important difference between these two.

Looking at RKH’s linep we find only slight weights to banks that could be takeover targets. Most of the funds big holdings would be buyers, not sellers, if banking M&A picks up.

On the other hand, almost all of KRE could be considered a takeover target, perhaps by some RKH constituents. That’s one more point in KRE’s favor making the ETF the winner of this ETF Showdown.

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