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Regional Bank ETFs: What Investors Need to Know

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Regional banks ETFs are rising this week. There are many reasons behind this trend.

The economy is gaining momentum and most of the recent economic reports, including the jobs report, have been better than expected. Regional banks benefit from an improving economy as loan growth picks up.

And rates are rising. The 10-year note yield, which was around 2.4% at the beginning of the year had surged to over 3.1% last month. It has since come down to around 2.95%, mainly due to geopolitical concerns.

Rates have been inching higher again after the jobs report and the Fed appears all set to raise rates at its meeting next week.

Last month, the congress approved the biggest roll-back of Dodd-Frank reforms that were enacted in the aftermath of the financial crisis. Small and regional banks are set to benefit from easing of these regulations.

A strong economy and higher interest rates benefit all banks but regional banks stand to benefit more since interest rate spread is their main source of earnings.

The SPDR S&P Regional Banking ETF (KRE) is the most popular ETF in the space with $5.2 B in AUM. It’s an equal-weighted ETF with 120 holdings.

The iShares U.S. Regional Banks ETF (IAT) has 53 holdings and top three holdings—U.S. Bancorp (USB), PNC Financial (PNC - Free Report) and BB&T (BBT)--account for more than one-third of assets.

The PowerShares KBW Regional Banking Portfolio (KBWR) also follows equal-weighing methodology. It has 50 holdings and higher exposure to small and micro-cap banks than the other two.

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