Leading regional banking exchange-traded funds (ETFs) set multi-year highs Tuesday after the 10-year Treasury yield climbed nine basis points to 1.30%, its highest level since February 2020. Rising bond yields benefit banks because this increases the net interest margin between what banks pay depositors and receive from borrowers. Moreover, higher interest rates indicate that market participants are factoring in a faster economic recovery from the COVID-19 pandemic amid unprecedented levels of government stimulus – another positive for regional banks, which rely heavily on the health of the domestic economy.
- Rising bond yields benefit banks because this increases the net interest margin between what they pay depositors and receive from borrowers.
- The SPDR S&P Regional Banking ETF (KRE) share price climbed to a 28-month high, keeping its strong uptrend intact.
- The iShares U.S. Regional Banks ETF (IAT) share price rallied to a new multi-year high on the highest trading volume in about two weeks.
Below, we take a closer look at two regional bank ETFs that soared to multi-year highs Tuesday. We'll also review the metrics of each fund and outline several tactical trading ideas.
SPDR S&P Regional Banking ETF (KRE)
Launched in 2006, the SPDR S&P Regional Banking ETF aims to track the performance of the S&P Regional Banks Select Industry Index – an equal-weighted index comprising U.S. regional banking stocks. Well-known industry names in the ETF's basket of around 130 holdings include SVB Financial Group (SIVB), Regions Financial Corporation (RF), and First Republic Bank (FRC). Trading-wise, narrow penny spreads, coupled with a daily turnover of more than 7 million shares, make the fund a popular choice for active traders. As of Feb. 17, 2021, KRE charges a 0.35% management fee, issues a 2.65% dividend yield, and trades 20.79% higher since the start of the year.
The ETF's share price climbed to a 28-month high Tuesday, keeping its strong uptrend intact from when the 50-day simple moving average (SMA) crossed above the 200-day SMA in early November to form a bullish golden cross buy signal. Short-term traders who want to position for further upside should consider targeting a move to the all-time high at $66.04 but cut losses if the fund closes below the recent price gap at $61.08. Alternatively, conservative traders may decide to enter on retracements to the blue trendline.
A gap is an area discontinuity in a security's chart where its price either rises or falls from the previous day's close with no trading occurring in between.
iShares U.S. Regional Banks ETF (IAT)
The iShares U.S. Regional Banks ETF seeks to return similar investment results to the Dow Jones U.S. Select Regional Banks Index. To do this, the fund invests its $292.3 million asset base in securities and depositary receipts that represent the underlying index. The ETF's top three holdings – Truist Financial Corporation (TFC), The PNC Financial Services Group, Inc. (PNC), and U.S. Bancorp (USB) – carry a cumulative portfolio weighting of around 35%, making it relatively top heavy to those names. Nearly $5 million in share turnover and a competitive 0.05% average spread keep transaction costs low and minimize slippage. IAT has an expense ratio of 0.42%, offers a 2.88% dividend yield, and trades up 17.56% year to date as of Feb. 17, 2021.
The fund rallied to a new multi-year high Tuesday on the highest trading volume in about two weeks. Those who want to play strong upside momentum should think about using a fast-period moving average, such as a 10-day SMA, as a trailing stop to let profits run. To do this, simply remain in the trade until the price closes below the indicator. Longer-term investors may decide to wait for a pullback to a well-respected five-month trendline that also finds support from the rising 50-day SMA.
A trailing stop is a modification of a typical stop order that can be set at a defined percentage or dollar amount away from a security's current market price.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.