Sexy is regional – you can bank on it

“Bank ETFs” and “sexy” are words that would not be caught dead in the same sentence a year ago. Fast forward 365 days later and that’s EXACTLY what’s happening. 

Regional bank ETFs are some of the hottest investment vehicles for 2021. Ahead of bank and Q2 earnings, financial advisors across the US have been on the prowl for these regional bank ETFs. What gives? One word: yields.

For the first part of 2020, bank stocks, including regionals severely underperformed. Bank of America (BAC), Citi ©, and JP Morgan Chase (JPM) all saw shares drop over 30% from the start of January to the close of March. The onslaught of a global pandemic caused major banks to increase their provisions out of concerns loan holders may default. 

But a funny thing happened on March 22nd, 2020: when asked in a 60 Minutes interview if the banks were “sound”  Neal Kashkari, president of the Federal Reserve Bank in Minneapolis replied “they are right now…big businesses are drawing down their credit lines, they are borrowing from the banks just because they are nervous and they are all drawing down on these credit lines at the same time. It puts stress on the banking system. And that’s when the Federal Reserve steps in, to provide that liquidity to make sure the banks have enough money to get out to their customers.” 

This interview was the reassurance institutions and retail investors needed (along with a massive purchase of commercial debt).

Instead of having a doomsday scenario play out, stimulus money, high demand for mortgages, and revenue from trading pushed earnings to unexpected levels. What’s more, regional banks were suddenly piquing investors’ interest in terms of dividend yields. This super boring sector was not only becoming a safe haven for deposits but also long-term investment strategies. And while the sector as a whole underperformed the S&P in 2020, financial advisors saw a long-term opportunity with regional bank ETFs as local and state economies open back up, deposits continue to rise and mortgages remain in high demand. 

Trackstar IQ data was able to show which bank ETFs are being researched by financial advisors like you. This is what we found: 

And financial advisors agree: the yields on KRE, IAT, and KBE are nothing short of beautiful. Let’s take a closer look: 

IAT: We could get into the weeds with this specific ETF but hear us out. There is something to be said for an ETF that tracks the Dow Jones U.S. Select Regional Banks Index. This index looks at the performance of the regional bank sub-sector of the U.S. equity market. According to ETFdb.com, It’s made up of 54 equities with a focus on small and mid-cap bank stocks. Performance over the 1-year period is 2.6% and the dividend yield is a stellar 2.83%. Daily trading volume runs around 350,000 shares.

KRE: This ETF tracks the S&P Regional Banks Select Industry Index. According to iShares, the ETF is made up of 128 holdings from the U.S. regional banking sector. Performance over 1-Year is 6.0% and an annual dividend yield of a whopping 2.65%. Daily trading volume runs around 6.6 million shares.

KBE: KBE tracks the S&P Banks Select Industry Index, an index composed of bank stocks. According to State Street SPDR, the ETF holds 90 different stocks with various market capitalizations and is not heavily concentrated on any single one of them. Daily trading volume runs around 3.7 million shares.

Takeaways

  • Regional banks are more sensitive to economic recovery (and rate changes) than large ones.
  • Many financial institutions set aside provisions for losses that never materialized, leaving a potential earnings tailwind.
  • Rather than going through each bank’s balance sheet and exposure, ETFs make it easier to diversify risk while still gaining exposure.
  • Not all ETFs are created equal. Some have a more diverse holding base than others.

Expected questions from clients: 

  • How exposed are these banks to the housing market?
  • What would a change in interest rates mean for these stocks?
  • How would adding this to a portfolio work with a broader ETF like the SPY?
  • How do these dividend yields compare to historical averages?

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