Regional bank etfs face off on rate hike buzz – nasdaq. com

As the rates are likely to remain low for longer than expected,

financials stocks and ETFs have turned up as the major losers. In

particular, regional banks are the worst hit as these banks seek to

borrow money at short-term rates and lend at long-term rates. Now,

if short-term rates do not rise and long-term rates fall, the banks

will earn less on lending and pay more on deposits, thereby leading

to a tighter spread. This would restrict net margins and put

pressure on banks’ profits.

However, comments from Fed officials last week point to a hawkish

stance. St. Louis Fed President James Bullard hinted that a rate

hike could come in April or June given that U. S. economy is

resilient and strong enough to handle higher rates. San Francisco

Fed President John Williams and Atlanta Fed President Dennis

Lockhart expect an interest rate hike as soon as April. Meanwhile,

Richmond Fed President Jeffrey Lacker believes that inflation is

moving higher and is on track to meet the Fed target of 2%.

Is Rate Hike Actually in Cards for April?

Given the slew of upbeat economic data lately, it seems that a rate

hike might come in the April meeting. This is because the economy

is growing on a modest path with the stronger-than-expected final

Q4 2015 GDP reading. The economy expanded at rate of 1.4%, much

higher than the second estimate of 1%. Personal consumption also

rose 2.4% instead of 2% gain reported earlier.

Further, unemployment dropped to an eight-year low of 4.9% and

inflation climbed 2.3% in the 12 months through February, marking

the biggest increase in more than three years, following the 2.2%

increase in January. Apart from these, cheap fuel will continue to

lift consumers spending power thereby boosting economic growth.

Notably, gas price has fallen by 46 cents from the year-ago period

to an average of $1.96 per gallon that has resulted in about $1,000

more to spend at each household (read:

US Hires More than Expected in Feb: ETFs &

Stocks to Buy


Given the heightened uncertainty surrounding the Fed policy,

regional bank ETFs have been in focus lately. In particular, the

two most popular ETFs –

SPDR S&P Regional Banking ETF (




iShares U. S. Regional Banks ETF (



shed 0.4% and 0.2%, respectively, over the past five days.

Being introduced in 2006, both funds have a Zacks ETF Rank of 2 or

‘Buy’ rating with a High risk outlook. While the duo might appear

similar at first glance, there are a number of key differences

between the two that are detailed below (see:

all the Financial ETFs here



This is one of largest and the most popular ETFs in the banking

space with AUM of nearly $1.9 billion and average daily volume of

more than 6 million shares. The product follows the S&P

Regional Banks Select Industry Index, charging investors 35 basis

points a year in fees. Holding 101 securities in its basket, the

fund is widely spread out across each security with none holding

more than 2.7%. Zions Bancorporation (


), CIT Group (


) and M&T Bank Corporation (


) occupy the top three positions in the basket.

The product has a certain tilt toward small cap stocks as these

account for 57% of the portfolio, followed by mid caps (34%) and

large caps (8%). The fund has gained about 9.5% in the year-to-date

timeframe (read:

Small Cap ETFs Leading Current Market Rally



This ETF offers exposure to 54 regional bank stocks by tracking the

Dow Jones U. S. Select Regional Banks Index. U. S. Bancorp (


) and PNC Financial Services (


) take the largest share with a combined 29.6% of assets while

other firms hold no more than 7.14% share. The fund has a nice mix

of all cap securities with 42% allocated to large caps, 33% to mid

caps and the rest to small caps.

The fund has amassed $416.9 million in its asset base and sees good

volume of 303,000 shares a day. It charges 44 bps in annual fees

and is down 8.7% so far this year.

The following table summarizes the similarities and dissimilarities

between the two regional bank ETFs:

KRE IAT Inception Date 06/09/2006 05/01/2006 Index S&P Regional Banks Select Industry Index Dow Jones U. S. Select Regional Banks Index AUM (in millions) $1,988.3 $416.9 No. of Holdings 101 54 % of assets in Top 10 Holdings 26.86% 61.29% Market Cap Exposure Small All Expense Ratio 0.35% 0.44% Average Daily Volume (as per xtf) 6,296,940 303,180 YTD Return (as of March 25) -9.52% -8.70% One Year Return (as of March 25) -4.39% -5.90%

To sum up, KRE and IAT track different indices and hold different

sets of stocks in their top 10 holdings with a larger concentration

on iShares product. Given a higher concentration risk, iShares

product underperformed the State Street counterpart by 1.51% over

the trailing one-year period. Further, IAT is expensive by 9 bps

and has a relatively higher bid/ask spread thereby increasing the

total cost of trading.

Investors should note that KRE focuses on small cap stocks while

IAT offers a diversified exposure to all caps, suggesting their

varied preferences.

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SPDR-KBW REG BK (KRE): ETF Research Reports

ISHARS-US RG BK (IAT): ETF Research Reports

PNC FINL SVC CP (PNC): Free Stock Analysis


US BANCORP (USB): Free Stock Analysis Report

ZIONS BANCORP (ZION): Free Stock Analysis


CIT GROUP (CIT): Free Stock Analysis Report

M&T BANK CORP (MTB): Free Stock Analysis


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.