Is it Time to Buy Regional Bank ETFs?

Financials stocks are the best performers among all S&P sectors over the past month, thanks mainly to the improving economy and rising hopes of a rate hike by the Fed in December. Fed fund futures currently suggest about 93% probability of another rate increase this year. Within the broader financials sector, regional banks are among the best performers.

A strong economy and higher interest rates benefit all banks’ profitability but regional banks will benefit more since interest rate spread is their main source of earnings. Further small and mid cap banks will also benefit from tax reforms, if anything gets done this year.

There are three ETFs that provide exposure to a diversified portfolio of regional banks.

SPDR KBW Regional Banking ETF (KRE)

The SPDR KBW Regional Banking ETF (NYSEARCA:KRE) is the most popular in the space with $3.6 billion in AUM. It’s an equal-weighted ETF; holding 109 securities in almost equal weights. Equal weighting results in higher exposure to mid and small cap banks.

The fund has an expense ratio of 35 basis points and a dividend yield of 1.39%.

iShares U.S. Regional Banks ETF (IAT)

iShares Dow Jones US Regional Banks ETF (NYSEARCA:IAT) has 53 holdings and top three holdings—U.S. Bancorp (USB), PNC Financial (PNC) and BB&T (BBT)—account for more than one-third of assets.

It has an ER of 44 basis points and a dividend yield of 1.45%.

PowerShares KBW Regional Banking Portfolio (KBWR)

PowerShares KBW Regional Banking Portfolio (NASDAQ:KBWR) is also an equal-weighted ETF with 50 holdings. It has higher exposure to small and micro-cap banks than the other two.

It has expense ratio of 35 basis points and a dividend yield of 1.59%.

To learn more about these ETFs, please watch the short video above.

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