Market Overview

Running To Regional Bank ETFs

Running To Regional Bank ETFs

The Federal Reserve is slated to meet later this month, and many bond market observers are expecting 2017's third interest rate hike to be the result. In anticipation of a rate hike, the financial services sector is surging, encouraging investors to flock to the S&P 500's second-largest sector weight.

Not surprisingly, the theme of embracing bank stocks ahead of another rate hike includes regional banks. Among the sectors and industries that are positively correlated to rising borrowing costs, regional banks are near the top of the list. That explains why the SPDR S&P Regional Bank ETF (NYSE: KRE), the largest regional bank exchange traded fund by assets, is up 4.5 percent over the past week.

The $4.3-billion KRE tracks the S&P Regional Banks Select Industry Index and holds 109 stocks. KRE is an equal-weight ETF where the largest component occupies less than 3.2 percent of the fund's overall weight.

Big Inflows

In recent days, investors have been returning to KRE in droves.

KRE “took in $290 million on Nov. 29, its largest daily inflow since 2008. That added to the almost $270 million the fund received the day before, as investors line up bets that regional banks will benefit from tax reform and deregulation,” according to Bloomberg.

Since the start of the fourth quarter, KRE has seen nearly $677 million in inflows. Confirming investors' enthusiasm for the financial services sector, the Financial Select Sector SPDR (NYSE: XLF), the largest ETF tracking the sector, has added $2.1 billion of new money this quarter. Only five ETFs have added more new capital this quarter than XLF.

Another Idea

Aggressive traders looking to capitalize on near-term upside in regional bank stocks can consier the Direxion Daily Regional Banks Bull 3X Shares (NYSE: DPST). DPST attempts to deliver triple the daily returns of the same index KRE follows.

Although DPST fell on Thursday, it finished November with a double-digit gain and was Direxion's third-best leveraged bull ETF for the month.

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Todd Shriber owns shares of XLF.


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