The regional bank sub-sector of the financials is lagging the large money centers in 2012. However, it is still outpacing the return of the S&P 500. The regional banks ran into issues during the financial crisis, but did not have the same type of exposure to the complicated derivatives as their larger peers.

Since the beginning of 2011 the SPDR Financial ETF (ARCA:XLF) has fallen by roughly 6.7% versus a gain of around 2% from the SPDR S&P Regional Banking ETF (ARCA:KRE). The charts are also very different between the two ETFs. KRE recently hit a fresh 22-month high as XLF has yet to breakout to a new 52-week high. While KRE is comprised of smaller regional banks, XLF is a basket of the largest banks in the U.S.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Regional Bank ETFs
There are 76 stocks that make up KRE, with a weighted average market capitalization of about $3.7 billion. The portfolio trades with a P/E ratio of nearly 14.2 and the current dividend yield is approximately 1.6%. The makeup of the ETF is conducive to investors that prefer diversification and want exposure to the entire sector. Zions Bancorp (Nasdaq:ZION) and Huntington Bancshares (Nasdaq:HBAN) are the two largest holdings and make up only around 3.77%, combined. The expense ratio for the ETF is a reasonable 0.35%.


Another competitor in the sector is the iShares Dow Jones Regional Bank ETF (ARCA:IAT), which is down over 4% from the beginning of 2011. The performance of the ETF is in-line with the larger banks, but lagging KRE substantially. The reason for the difference in performance is the makeup of the ETF. Whereas KRE is extremely diverse, IAT is concentrated on a few of the top holdings. U.S. Bancorp (NYSE:USB) is the top holding with nearly 21% of the allocation, followed by PNC Financial Services (NYSE:PNC) with almost 12% of the ETF. With one-third of the portfolio in only two stocks, investors do not achieve the true diversification that is often the goal of an ETF.

There are 62 stocks in the ETF, which charges an expense ratio of 0.47%. The dividend yield is about 1.7% and the ETF trades with a P/E ratio of roughly 12. Even though the valuations are similar for KRE and IAT, the makeup is extremely different, as are the returns for investors. Of the two ETFs, KRE is a true regional bank ETF and would be my choice in the sector.

SEE:
The Importance Of Diversification


The Bottom Line
The biggest risk to the regional banking sector would be a repeat of last summer, when issues in Europe rose to the headlines. Even though the prolonged troubles in Europe will not directly affect most regional banks, the spillover affect could hurt the sector. It is important to monitor the situation in the coming weeks, if you decide to buy into any of the related ETFs or stocks.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Mutual Funds & ETFs

    ETFs Can Be Safe Investments, If Used Correctly

    Learn about how ETFs can be a safe investment option if you know which funds to choose, including the basics of both indexed and leveraged ETFs.
  2. Mutual Funds & ETFs

    The Top 5 Large Cap Core ETFs for 2016 (VUG, SPLV)

    Look out for these five ETFs in 2016, and learn why investors should closely watch how the Federal Reserve moves heading into the new year.
  3. Economics

    India: Why it Might Pay to Be Bullish Right Now

    Many investors are bullish on India for all the right reasons. Does it present an investing opportunity?
  4. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  5. Investing Basics

    Building My Portfolio with BlackRock ETFs and Mutual Funds (ITOT, IXUS)

    Find out how to construct the ideal investment portfolio utilizing BlackRock's tools, resources and its popular low-cost exchange-traded funds (ETFs).
  6. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  7. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  8. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  9. Investing

    3 Things About International Investing and Currency

    As world monetary policy continues to diverge rocking bottom on interest rates while the Fed raises them, expect currencies to continue their bumpy ride.
  10. Stock Analysis

    Tech Stocks Vs. Financial Stocks in 2016

    Consider the arguments for allocating more of your investment portfolio to either the technology sector or the financial sector for 2016.
RELATED FAQS
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center