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What Caused Huge Outflows in Regional Bank ETFs in November

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Flattening of the yield curve and the struggling housing markets are acting as headwinds to the regional banks ETFs. Of late, banks have come under pressure as investors worry that rising rates might slow down lending and raise the amount the banks need to pay customers as interest.

In November, SPDR S&P Regional Banking ETF (KRE - Free Report) saw their largest monthly outflows since January 2015 with investors withdrawing about $547 million. This happened to be the second straight month of net withdrawals. Also, SPDR S&P Bank ETF (KBE - Free Report) , targeting a broader swath of banks including regional ones, saw net outflows of more than $213 million. This was KBE’s biggest outflow since the month of May and the seventh month of outflows in the last eight months. In November, iShares U.S. Regional Banks ETF (IAT - Free Report) and Invesco KBW Regional Banking ETF (KBWR - Free Report) saw net outflows of $25.8 million and $10.4 million, respectively.

On Dec 3, the gap between the two-year and 10-year Treasury yields narrowed to its lowest level in a decade, falling below 0.15 percentage points. In general, investors usually demand higher yields to commit money for long periods of time. But when the short-term yields approach long-term yields, it may imply doubts with regard to the immediate future.

An inverted yield curve has preceded past recessions. In fact, the gap between three and five-year Treasury yield already fell to negative 0.01 percentage point on Dec 3. This has happened for the first time since 2007. Dallas Federal Reserve bank president Robert Kaplan said on Dec 3 that the narrowing of the spread between two-year and 10-year Treasuries mirrors expectations of sluggish global growth (read: 4 High Dividend-Yielding Stocks for a Volatile Market).

So far, banks haven’t made changes to their lending policies in response to the flattening of the yield curve. As per the recent Fed loan officer’s survey, there could be tightening up in the lending standards if the short-term rates move above the long-term counterparts. Per the survey, a major number of banks responded that they would become less profitable and more risk averse, in an inverse yield curve scenario.

The housing markets are also anxious with labor and land shortages, rising mortgage rates and tighter inventories. This is curbing potential buyers’ appetite to avail loans for purchasing homes.

However, things are not so gloomy for the banks. Banks performed really well in the stress tests conducted in summer. Per a Deloitte report, aggressive policy interventions have helped the health of banks to a large extent. Also, favorable GDP growth, tax cuts and a rising rate scenario have driven the banking industry’s growth. Against this backdrop, we highlight the above-mentioned ETFs in detail (see: all the Financial ETFs here):

KRE

The fund tracks the S&P Regional Banks Select Industry Index and comprises 127 holdings. Signature Bank (SBNY - Free Report) occupies the top position with 2% weight. The fund’s AUM is $4 billion and expense ratio is 0.35% (read: ETFs That Tend To Win & Lose When Rates Rise).

KBE

 The fund tracks the S&P Banks Select Industry Index and comprises 85 holdings. LendingTree Inc (TREE - Free Report) (1.8%) occupies the top position.  Regional banks have 77% allocation in the fund. The fund’s AUM is $3 billion and expense ratio is 0.35%.

IAT

The fund tracks the Dow Jones U.S. Select Regional Banks Index and comprises 59 holdings. U.S. Bancorp (USB - Free Report) is at the top of the fund pool with 14.7% weight. The fund’s AUM is $691.3 million and expense ratio is 0.43%.

KBWR

The fund tracks the KBW Regional Banking Index and comprises 50 holdings. East West Bancorp Inc (EWBC - Free Report) occupies the top position with a weight of 3.8%. The fund’s AUM is $124.7 million and expense ratio is 0.35%.

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