The Surprising Financial ETF Pick By the Pros

Technology companies led markets higher for the past several years.

Lately, we’re seeing signs of a rotation into financial stocks.

According to our TrackStar data, financial pros increased their searches for banks in June while decreasing searches for tech companies.

Interestingly, the top financial ETF search is the S&P Regional Bank ETF KRE.

Folks remember this ETF from the crisis a few years back that took down Silicon Valley Bank. 

Year-to-date, the stock is down 6.7%.

However, it gained almost 4% in the past week.

With the Fed poised to cut interest rates in the next year, the KRE could make an interesting trade.

Key Facts About SMH

• Net assets: $2.7 billion
• 12-month trailing yield: 3.23%
• Inception: June 19, 2006
• Expense ratio: 0.35%
• Number of holdings: 142

The KRE is the market’s most well-known and actively traded regional banking ETF.

With 142 holdings equally weighted, the ETF focuses on regional banks that are generally limited in geography and have assets between $10 billion and $100 billion.

Source: State Street

Many of these banks focus more on local lending, whereas national banks do more wealth management and commercial services.

This makes regional banks more sensitive to interest rate changes. 

And generally speaking, higher rates favor banks because the spread between what they pay depositors and what they lend is greater.

However, that paradigm has shifted, with banks being forced to raise deposit rates to lure in cash.

So, lower rates would actually benefit regional banks by boosting borrowing activity.

Performance

The regional banking crisis lopped off a chunk of gains the sector has yet to make back.

Thus, it’s only up about 6.4% over the past five years.

Source: State Street

However, individual banks within the sector have fared better, especially those with less exposure to short-term interest rates.

Competition

We stacked up the KRE against other popular financial ETFs including the XLF to give you a sense of the investment choices out there.

• Financial Select Sector SPDR Fund (XLF): The market-cap weighted XLF is the best-known financial sector ETF, holding the largest U.S. financial companies, including banks, payment processors, and insurance companies.
• Direxion Daily Regional Banks Bull 3X Shares (DPST): If you’re looking for leveraged exposure to regional banks, the DPST gives you 3x the daily move of the regional banking sector.
• Direxion Daily Financial Bear 3X Shares (FAZ): Similar to the DPST, FAZ gives you 3x leverage to the daily moves of the broader financial sector.
• iShares MSCI Europe Financials ETF (EUFN): If you’re looking for some international finance, the EUFN is a market-cap weighted ETF holding 81 of the top financial companies in Europe, like UBS and HSBC.

The KRE significantly underperforms the broader financial sector in the U.S. and Europe. It also has a slightly higher expense ratio than the broader financial sector ETF.

Our Opinion 7/10 

Relative to the other financial ETFs, the KRE is good but not great.

It pays a healthy dividend and provides plenty of liquidity.

However, its performance is abysmal, and the equal-weight approach prevents it from gaining any real traction.

With lending and finance moving more towards larger institutions, the KRE ETF will keep playing second fiddle to the XLF.