Regional Banking ETF Showdown – KRE, IAT, KBWR

| September 18, 2013 | 0 Comments

bankIn today’s ETF showdown, we’re taking a look at Regional Bank ETFs.

As you know, ETF providers like iShares, State Street, ProShares, and many others offer ETFs that sound similar.  But just because they have a similar name doesn’t mean they’ll have the same performance.

When your hard-earned money is on the line, selecting the right ETFs is crucial to maximizing your profits and minimizing your losses. 

After months of speculation, today is the day we’ll find out if the Fed will begin winding down its massive monetary stimulus program.  At this point, it’s all but certain the Fed will reduce their $85 billion in monthly asset purchases by $10 to $15 billion per month. 

The mere speculation of the end of the program sent the 10-year Treasury and mortgage rates soaring higher earlier this year. 

Needless to say, it will be interesting to see if the changes are already baked into the cake or if interest rates will surge higher again.

One industry that should benefit from the rising interest rate environment is regional banks.  They make money by borrowing money short term at low rates and lending it out longer term at a higher rate.

The difference between the interest income generated on loans they have made and the amount of interest they paid out on deposits is called net interest margin or NIM for short.

It’s usually a good time to invest in regional banks when the NIMs are expanding.

Let’s take a look at three popular regional bank ETFs… 

The undisputed heavyweight in this industry is SPDR KBW Regional Banking ETF (KRE).  Its $2 billion in assets under management (AUM) are four times as much as any other ETF in this space. 

At a recent price of $36.23, KRE’s up 30% year-to-date.  That’s the best return among regional banking ETFs this year. 

It also has one of the lowest expense ratios at 0.35%.  And it pays an annual dividend of $0.59 for an annual dividend yield of 1.66%.   

This ETF tracks the S&P Regional Banks Select Industry Index.  It is a modified equal-weighted index.  It holds 79 publicly traded companies that do business as regional banks or thrifts.

The second largest regional banking ETF is iShares US Regional Banks ETF (IAT).  It has $515 million in AUM. 

At a recent price of $30.66, IAT has returned 26% this year…. slightly less than KRE’s 30% gain. 

It has an expense ratio of 0.48%.  And it pays an annual dividend of $0.61 to give it an annual dividend yield of 1.6%. 

IAT tracks an index of US regional banks that uses market-cap weighting to determine the percentage of assets in each of its 58 holdings.    

Finally, PowerShares KBW Regional Banking Portfolio (KBWR) is the smallest of the three ETFs in terms of assets under management with just $34 million. 

At a recent price of $35.09, KBWR has gained 28% this year. 

It’s tied with KRE for the lowest expense ratio of 0.35%.  It pays an annual dividend of $0.61 to give it an annual dividend yield of 1.75%… the best among regional bank ETFs.  

KRE tracks an equal weighted float-adjusted market capitalization index.  It holds 50 publicly traded companies that do business as regional banks or thrifts listed on US stock markets. The Fund and the Index are rebalanced and reconstituted quarterly.

Here’s the bottom line…

The Fed is tinkering with their monetary policy to reflect the improvement in US economic conditions.  And it’s driving long term interest rates higher.  But short term interest rates are expected to remain low for at least another year. 

This environment should allow regional banks to expand net interest margins and make more money. 

In this case, KRE seems to be the best regional banking ETF.  It’s the largest and most liquid ETF with the best gains and lowest expenses to boot.

Good Investing,

Corey Williams

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Category: ETFs

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets three times a week. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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