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U.S. Regional Bank ETFs at a Six-Week High: Here's Why

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By now, we all know that the U.S. economy went through a crisis triggered by its regional banking sector in the March-April period. The collapse of three U.S. regional banks since March raised fears of a volley of bank failures. The fragility of the banking system also highlighted concerns about regulatory oversight and systemic risk, and regulators must ensure effective risk management to mitigate these risks.

Stabilization of Regional Bank Stocks

However, as the chaos settled down, regional bank stocks bounced back with an immense force, due to easing banking volatility and investors’ considerably high risk-on sentiment. These stocks are now trading at a six-week high. Financial institutions such as PacWest and Western Alliance, which previously found themselves in troubled waters, have made a moderate comeback after a significant dip during the peak of the crisis.

U.S. banks could also face capital hikes of as much as 20% under new rules being prepared by U.S. regulators as part of a global effort to solidify capital requirements, Reuters reported on Monday, as quoted on Economic Times. This is another positive for the space.

Single stock picking is currently tough in the regional banking space. Hence, one should go for the ETF approach. If you are a long-term investor, you can bet on regional bank ETFs like SPDR S&P Regional Banking ETF (KRE - Free Report) , iShares U.S. Regional Banks ETF (IAT - Free Report) and Invesco KBW Regional Banking ETF (KBWR - Free Report) and Nasdaq Aba Community Bank Index (QABA - Free Report) .

Banking Indicators Point to Positive Recovery

Regional deposits and loans also rose in recent weeks. This reflects a revitalization in investor sentiment, which has been hovering at unusually high levels, according to Tom Lee, Fundstrat's chief research office, as quoted on Business Insider.

The surge in sentiment can be attributed to the Federal Reserve's recent decision to increase rates by 25 basis points. Investors are speculating that the Fed will halt rate increases at their next policy meeting before lowering rates later in 2023.

This predicted policy change could stimulate stock growth, especially in regional bank stocks, since experts believe the banking crisis was triggered by a sharp increase in interest rates over the past year.

Is It a Temporary Relief for Regional Banks?

So, the journey from here is dependent on the Fed’s moves. If the Fed acts less hawkish or dovish in the coming days, we could see a rally in regional banking ETFs. A less-hawkish Fed should boost investing in growth sectors like technology.

Then, regional banks exposed to the small-cap tech sector or tech start-ups should not face much of the crisis. Not only that, several other sectors like real estate and homebuilding should prosper in a low-rate environment and not pose any threat to regional banks.

Industry leaders like JPMorgan CEO Jamie Dimon suggest that the wave of banking failures is largely over. But he also warned that the market could encounter more difficulties as banks scale back lending and tighten financial conditions further.

Final Thoughts

Regional banks are at a crucial turning point. The ability to sustain this resurgence will rely heavily on policy decisions and management of interest rates by the Fed.

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