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U.S. regional bank stocks have bounced back from the collapse of Silicon Valley Bank. This is especially true as these stocks recorded their best monthly performance, outperforming the broader market. Notably, the KBW Nasdaq Regional Banking index climbed 18% in July, its best month since November 2016.
With this, the ETFs in the space also rallied. SPDR S&P Regional Banking ETF (KRE - Free Report) was the biggest beneficiary, surging nearly 18%. Invesco KBW Regional Banking ETF (KBWR - Free Report) and iShares U.S. Regional Banks ETF (IAT - Free Report) rose 17.3% and 14%, respectively.
Inside The Surge
Most of the gains were driven by better-than-expected earnings reports, which revealed healthier balance sheets than the previous quarter, with higher-quality loans and more money set aside to cover surprise losses. Interest income rose and deposits stabilized.
Additionally, the Fed rate hike drove the stocks higher. In its latest meeting, the Fed raised interest rates by a quarter-percentage point to 5.25-5.50%, the highest level since March 2001, and signaled the possibility of further increases ahead. As banks seek to borrow money at short-term rates and lend at long-term rates, the rise in interest rates will earn more on lending and pay less on deposits, leading to a wider spread. This will expand net margins and increase banks’ profits.
When the Fed increases interest rates, pressure on margins will gradually alleviate and support banks’ net interest income. Notably, banks earn a major portion of their revenues from interest income (read: 5 Top-Performing Sector ETFs of July).
Further, the resilient economy backed by strong hiring, rising consumer confidence and increasing wages will continue to support the banking industry. The U.S. so far has avoided a much-forecast recession that has contributed to the turnaround in the sector.
With the ongoing economic recovery, technological advancements and favorable monetary policies, regional banks are poised for further growth and could continue to be an attractive option for investors seeking promising opportunities in the financial markets.
SPDR S&P Regional Banking ETF provides exposure to the regional banks segment by tracking the S&P Regional Banks Select Industry Index. It holds 139 stocks in its basket, with each accounting for no more than 2.3% of the assets.
SPDR S&P Regional Banking ETF has AUM of $3.6 billion and charges 35 bps in annual fees. It trades in an average daily volume of 20.3 million shares (read: 5 Top-Performing ETF Areas of July).
Invesco KBW Regional Banking ETF offers exposure to publicly traded U.S. regional banking and thrift companies by tracking the KBW Nasdaq Regional Banking Index. It holds 52 stocks in its basket, with none accounting for more than 4.3% of assets.
Invesco KBW Regional Banking ETF is a relatively less-popular and less-liquid option in the space, with AUM of $65.1 million and an average daily volume of 15,000 shares. It charges 35 bps in fees per year from investors.
iShares U.S. Regional Banks ETF offers exposure to 35 small and mid-cap regional bank stocks by tracking the Dow Jones U.S. Select Regional Banks Index. It is largely concentrated on the top three firms with a double-digit allocation each (see: all the Financials ETFs here).
iShares U.S. Regional Banks ETF has amassed $792.2 million in its asset base while seeing a good volume of 688,000 shares a day. The product charges 40 bps in annual fees.
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Regional Bank ETFs Rallying: Here's Why
U.S. regional bank stocks have bounced back from the collapse of Silicon Valley Bank. This is especially true as these stocks recorded their best monthly performance, outperforming the broader market. Notably, the KBW Nasdaq Regional Banking index climbed 18% in July, its best month since November 2016.
With this, the ETFs in the space also rallied. SPDR S&P Regional Banking ETF (KRE - Free Report) was the biggest beneficiary, surging nearly 18%. Invesco KBW Regional Banking ETF (KBWR - Free Report) and iShares U.S. Regional Banks ETF (IAT - Free Report) rose 17.3% and 14%, respectively.
Inside The Surge
Most of the gains were driven by better-than-expected earnings reports, which revealed healthier balance sheets than the previous quarter, with higher-quality loans and more money set aside to cover surprise losses. Interest income rose and deposits stabilized.
Additionally, the Fed rate hike drove the stocks higher. In its latest meeting, the Fed raised interest rates by a quarter-percentage point to 5.25-5.50%, the highest level since March 2001, and signaled the possibility of further increases ahead. As banks seek to borrow money at short-term rates and lend at long-term rates, the rise in interest rates will earn more on lending and pay less on deposits, leading to a wider spread. This will expand net margins and increase banks’ profits.
When the Fed increases interest rates, pressure on margins will gradually alleviate and support banks’ net interest income. Notably, banks earn a major portion of their revenues from interest income (read: 5 Top-Performing Sector ETFs of July).
Further, the resilient economy backed by strong hiring, rising consumer confidence and increasing wages will continue to support the banking industry. The U.S. so far has avoided a much-forecast recession that has contributed to the turnaround in the sector.
With the ongoing economic recovery, technological advancements and favorable monetary policies, regional banks are poised for further growth and could continue to be an attractive option for investors seeking promising opportunities in the financial markets.
We have profiled the abovementioned ETFs below:
SPDR S&P Regional Banking ETF (KRE - Free Report)
SPDR S&P Regional Banking ETF provides exposure to the regional banks segment by tracking the S&P Regional Banks Select Industry Index. It holds 139 stocks in its basket, with each accounting for no more than 2.3% of the assets.
SPDR S&P Regional Banking ETF has AUM of $3.6 billion and charges 35 bps in annual fees. It trades in an average daily volume of 20.3 million shares (read: 5 Top-Performing ETF Areas of July).
Invesco KBW Regional Banking ETF (KBWR - Free Report)
Invesco KBW Regional Banking ETF offers exposure to publicly traded U.S. regional banking and thrift companies by tracking the KBW Nasdaq Regional Banking Index. It holds 52 stocks in its basket, with none accounting for more than 4.3% of assets.
Invesco KBW Regional Banking ETF is a relatively less-popular and less-liquid option in the space, with AUM of $65.1 million and an average daily volume of 15,000 shares. It charges 35 bps in fees per year from investors.
iShares U.S. Regional Banks ETF (IAT - Free Report)
iShares U.S. Regional Banks ETF offers exposure to 35 small and mid-cap regional bank stocks by tracking the Dow Jones U.S. Select Regional Banks Index. It is largely concentrated on the top three firms with a double-digit allocation each (see: all the Financials ETFs here).
iShares U.S. Regional Banks ETF has amassed $792.2 million in its asset base while seeing a good volume of 688,000 shares a day. The product charges 40 bps in annual fees.