Regional Bank ETFs KRE, IAT Soar on Profitability Outlook
- IAT and KRE have both jumped more than 15% over the past month, outpacing VOO.
- A steepening yield curve is boosting optimism that loan portfolios will generate more profits.
- The Trump administration's loosening of bank oversight may also be boosting ETFs.
Regional bank ETFs, battered during the 2023 Silicon Valley Bank meltdown, have surged over the past month as investors bet that rising long-term yields and potential deregulation will boost profits.
The $3.8 billion SPDR S&P Regional Banking ETF (KRE) and the $603.6 million iShares U.S. Regional Banks ETF (IAT) have both jumped more than 15% over the past month. That’s a partial climb back from the 30% tumble both funds took between late November and early April, and ahead of the past month's 9.9% gain in the S&P 500-tracking Vanguard S&P 500 ETF (VOO).
Steepening Yield Curve
Yields on 10-year loans have risen past those on two-year loans, a so-called yield curve steepening. This signals potentially higher profits for banks in the form of more interest income, while the spread between interest paid on deposits and interest earned widens.
“Yield curve normalizing is generally good for regional banks,” etf.com Research Lead Kent Thune, CFP, said, adding that banks are refinancing short-term debt. “Lower short-term yields are good for this.”
At the same time, investors are watching the Trump administration’s efforts to loosen regulations on the financial industry. The Consumer Financial Protection Bureau has said it will stop enforcing some Biden-era banking rules, and news outlets are reporting that the administration plans to slash capital rules, put in place after the 2008 Great Recession, to stimulate lending.
KRE, IAT Assets Rebound
Investors have dropped $76.3 million into KRE over the past month, a bright spot in the fund that’s had net outflows of $1.4 billion this year. IAT investors have pulled a net $87.3 million from the fund over the past month, and a total of $115.9 million in net outflows have exited so far this year.
KRE vs. VOO—Source: FactSet data
Regional bank ETFs took a beating during the 2023 crisis sparked by meltdowns and rescues of banks, including Silicon Valley Bank, Signature Bank and First Republic. KRE's biggest holding is a 3.1% allocation to East West Bancorp Inc. (EWBC).
Its performance trails the 17% monthly gain in the $3.8 billion Invesco KBW Bank ETF (KBWB), which holds global banks like Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM) and Morgan Stanley (MS), Bloomberg ETF Analyst Athanasios Psarofagis noted in an emailed comment.
