Regional banks have been leading the financial sector higher for much of 2013. This space has been a strong player as worries over global growth rose, and investors wanted to focus on the U.S. market for exposure.
Beyond this, regional banks have also been prime beneficiaries from a widening spread between long and short term rates. This has largely been due to expectations of QE tapering which could boost yields on longer dated securities while keeping the short end of the curve subdued.
While many investors thought that the QE taper would begin in the September meeting, Bernanke and company squashed this idea, choosing instead to keep the $85 billion in monthly QE intact. This led to a big immediate decline in rates, and it helped push down expectations for mid-term Treasury debt as well.
In fact, five year government debt, which was trading around the 1.85% level as late as the fifth of September, has been on a steady decline lately. These notes then plunged from 1.62% to 1.43% immediately following the announcement, before settling just under the 1.50% mark in the first full day after the ‘no taper’ release (see 3 ETF Winners from the No Taper Shocker).
This decline in medium-term debt levels and rising expectations that we may see either a modest taper at the next Fed meeting, or even another ‘no taper’ announcement, left expectations of a compressed spread pretty high.
Impact and How to Play Going Forward
The combination of this decline in rates along with muted expectations for future tapering had a pretty negative impact on regional bank ETFs in Thursday trading, pushing them down more than the overall market in the time frame. The sluggish trading lately may also be causing investors to question more purchases in this once-soaring space, especially given recent events.
However, the taper is still going to come eventually, and rates have actually already regained some of their momentum. So while rates may be still off of their recent highs, it is pretty reasonable to expect them to rise back to previous levels in the coming weeks.
And when the Fed does inevitably taper, the spread will once again widen, making a regional bank investment a pretty solid play. For this reason, investors looking out at least a few months might consider the recent slump in the space as a decent buying opportunity, and a great way to get in ahead of the eventual taper in a positive way.
While investors can certainly buy up any regional bank stock out in the market, an ETF approach may also be a sound idea. This technique allows investors to play the broad trends in the space without worrying about company specific issues, potentially lowering risk in the process.
For investors intrigued by this idea, we have highlighted some regional bank ETFs below. Any of these could be interesting choices to get in on the solid trend in this corner of the market and buy some well-positioned companies on the dip.
SPDR S&P Regional Banking ETF (KRE)
This is the most popular regional banking ETF on the market, with over $2 billion in assets under management. The fund saw extreme volume of about 11.2 million shares—compared to an average of about 2.3 million—for Thursday’s session, in which it slumped by 1.8%.(...)Click here to continue reading the original ETFDailyNews.com article: The Investment Case For Regional Bank ETFsYou are viewing an abbreviated republication of ETF Daily News content. You can find full ETF Daily News articles on (www.etfdailynews.com)
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