10 Best Regional Bank ETFs
In this article, we will take a look at the 10 best regional bank ETFs. If you want to skip our discussion on the banking industry, you can check out the 5 Best Regional Bank ETFs.
It has been over six months since the US regional bank crisis unfolded in March 2023. Experts believe that the crisis had a permanent impact on the US regional bank industry and the overall economy. The crisis resulted in the imposition of stricter credit restrictions by regional banks, worsening an already challenging environment characterized by the increase in benchmark interest rates by the US Federal Reserve to combat inflation and cool down the economy. Experts add that the impact of the regional banking crisis can be seen as similar to the effect of 50 basis points (bps) to 75 bps increase rate hike by the US central bank. Furthermore, the crisis is expected to adversely impact the US GDP by 1.5% in the next 12 to 18 months.
Notable banks had begun reducing the amount of credit offerings when the US Federal Reserve started interest rate hikes in 2022. However, it wasn't until the collapse of Silicon Valley Bank (SVB) in March 2023 that regional banks, particularly those with assets ranging from $10 billion to $100 billion, pulled back on their loan offerings. The SVB crisis took place when corporate accounts, tech startups, and venture funds decided to withdraw $42 billion in a single day on March 10. This resulted in a run on the bank as the confidence of the depositors plummeted, and they looked for alternative big banks. The failure of the SVB was followed by the downfall of the New York-based Signature Bank, which had heavy exposure in the cryptocurrency world. The bank had also faced a high level of uncertainty for nearly a year. Similarly, First Republic Bank also found itself in crisis. JPMorgan Chase & Co. (NYSE:JPM) initially rescued First Republic through a $10 billion financing in March 2023 and subsequently acquired and rescued the bank in May 2023. This cemented JPMorgan’s position as the industry leader in the banking sector. Within a short period, the US faced the second, third, and fourth biggest banking failure in its history through the downfall of First Republic, SVB, and Signature Bank. All these distressed banks had heavy exposure to sectors that are adversely impacted by interest rate increases.
Role of Regional Banks in the US Banking Sector
Many experts and industry observers believe that regional banks play a crucial role in supporting the stability of the US banking sector. This is because large, diversified financial services giants such as Bank of America Corporation (NYSE:BAC), Citigroup Inc. (NYSE:C), JPMorgan Chase & Co. (NYSE:JPM), and Wells Fargo & Company (NYSE:WFC) are increasingly focused on their global capital market activities, often allocating resources and investments outside the United States. This has led to the perception that these mega-banks may not be as actively engaged in fostering domestic production and supporting small businesses as regional banks are. Small businesses, which employ nearly 50% of all private sector workers in the United States, often prefer to establish relationships with smaller or mid-sized banks. In 1994, the US Congress enacted legislation that led to a significant shift in the banking industry. This legislative change allowed banks to expand their operations into multiple states for the first time and permitted bank mergers. Following this development, the number of banks in the US plummeted from 10,000 to 4,200 from 1995 to 2021. Simultaneously, the number of bank branches increased from 59,000 to 72,000. This shift occurred as numerous national banks capitalized on the opportunity to expand their presence across states, leading to the consolidation of smaller banks and the growth of larger institutions.
In response to the evolving landscape, several regional banks have initiated strategies such as offering higher interest rates on deposits and charging higher rates on loans to safeguard their profit margins. The Federal Reserve has also boosted its support for banks that are perceived to be in trouble by increasing the Bank Term Funding Program (BTFP) to $108 billion in September. The program offers better rates than other sources of lending, like the Federal Home Loan Banks (FHLB). These are some of the government-backed sources of monetary easing. However, these initiatives are temporary and will result in a tightening in credit availability once they are concluded.
Exploring Regional Bank ETF Options for Investment
For investors seeking a more bullish stance on regional banks with a 3x leverage factor, there is an option in the form of the Direxion Daily Regional Banks Bull 3X Shares (NYSEARCA:DPST). The ETF was launched in August 2015 and charges an annual management fee of 0.93% to provide 3x leveraged exposure to an index of US regional banks. The fund's benchmark index is the S&P Regional Banks Select Industry Index, which tracks the performance of regional banks in the S&P Total Market Index. The ETF invests in swap agreements, futures contracts, and other financial instruments to achieve triple the daily return of its underlying index. Due to the use of leverage, the regional bank ETF offering 3x leverage is considered a risky and volatile investment meant for short-term tactical traders.
Additionally, for more specific exposure to US regional banks, investors may turn to the iShares U.S. Regional Banks ETF (NYSEARCA:IAT). The ETF was launched in May 2006. It charges a management fee of 0.40% and comprises 35 holdings. It is designed to provide focused exposure to the US regional banking sector. The iShares U.S. Financials ETF (NYSEARCA:IYF) can also be regarded as an iShares bank ETF as it provides wide exposure to all segments of the banking industry. Furthermore, while Vanguard does not offer a dedicated ETF solely focused on US regional banks, investors seeking exposure to this sector can consider the Vanguard Financials Index Fund (NYSEARCA:VFH) as one of the best Vanguard bank ETFs. This fund offers a broader exposure to the financial sector. You can also check out the 12 Best Bank Stocks To Buy For Long-Term here.
Our Methodology
We have shortlisted the 10 best regional bank ETFs based on their 5-year performance. Some of the ETFs listed below are pure plays on the regional banking industry, while others offer broader exposure to the financial sector and the banking industry. While some of these ETFs have generated negative returns over the past 5 years due to difficult economic circumstances, experts hold an optimistic outlook for the banking sector's recovery, making these ETFs attractive investment options. The best regional bank ETFs have been ranked in ascending order of their 5-year performance as of September 25.
Best Regional Bank ETFs
10. First Trust NASDAQ ABA Community Bank Index Fund (NASDAQ:QABA)
5-Year Price Performance: -28.9%
Total Net Assets as of September 25, 2023: $63.35 million
Expense Ratio: 0.60%
Number of Holdings: 143
First Trust NASDAQ ABA Community Bank Index Fund (NASDAQ:QABA) invests in regional and community banks listed on the NASDAQ stock exchange. The ETF tracks the NASDAQ OMX ABA Community Bank Index. The fund pays out a variable quarterly dividend based on the dividends of its holdings and offers a yield of 2.97%. Overall, First Trust NASDAQ ABA Community Bank Index Fund (NASDAQ:QABA) provides targeted exposure to small regional bank stocks for investors looking to concentrate their investments in this area.
9. Invesco KBW Bank ETF (NASDAQ:KBWB)
5-Year Price Performance: -28.7%
Total Net Assets as of September 25, 2023: $1.76 billion
Expense Ratio: 0.35%
Number of Holdings: 26
Invesco KBW Bank ETF (NASDAQ:KBWB) tracks an index of leading US bank stocks, which are selected based on factors such as market cap, liquidity, and fundamental growth rates. Some of the regional bank stocks included in the ETF’s portfolio are East West Bancorp, Inc. (NASDAQ:EWBC), First Horizon Corporation (NYSE:FHN), Comerica Incorporated (NYSE:CMA) and Zions Bancorporation, National Association (NASDAQ:ZION). Together, these stocks represent 5.6% of total assets. These regional banks cater to local, commercial, retail, small business, and wealth management needs within their operating markets.
Here's what ClearBridge Investments said about First Horizon Corporation (NYSE:FHN) in its Q2 2023 investor letter:
“The financials sector was also a positive contributor to relative outperformance during the quarter as fears of further contagion of March’s bank crisis eased and allowed for a rebound in many of the higher-quality small and regional banks caught up in the panic. For example, as investor pessimism dissipated, Bank OZK exceeded analyst expectations and raised its quarterly dividend, highlighting continued improvement in its net interest income margin in the first quarter. We capitalized on the retreat in bank stocks early in the quarter to initiate a new position in regional bank First Horizon Corporation (NYSE:FHN), which reflected a unique opportunity to buy a bank with an extremely strong capital and liquidity profile at a distressed value after its deal to be acquired by Toronto Dominion was canceled through no fault of First Horizon. While we continue to be vigilant for signs of further deterioration in the sector, we have high conviction in our holdings and believe that they will continue to be positive contributors to our long-term performance.”
8. Invesco KBW Regional Banking ETF (NASDAQ:KBWR)
5-Year Price Performance: -25.7%
Total Net Assets as of September 25, 2023: $59.01 million
Expense Ratio: 0.35%
Number of Holdings: 51
Invesco KBW Regional Banking ETF (NASDAQ:KBWR) was launched in November 2011. The fund tracks the KBW NASDAQ Regional Banking Index, which contains regional banking stocks selected based on market cap, liquidity, and fundamentals. The ETF pays out dividends quarterly and offers a dividend yield of 3.25%. New York Community Bancorp, Inc. (NYSE:NYCB), Webster Financial Corporation (NYSE:WBS), Commerce Bancshares, Inc. (NASDAQ:CBSH), and Cullen/Frost Bankers, Inc. (NYSE:CFR) are the top five holdings of the ETF and represent 18.4% of the total assets.
Here's what Diamond Hill Capital said about Webster Financial Corporation (NYSE:WBS) in its Q1 2023 investor letter:
“Our bottom contributors in Q1 were heavily concentrated in the financials sector, including Live Oak Bancshares, First Interstate BancSystem, Bank OZK, BOK Financial Corporation, and Webster Financial Corporation (NYSE:WBS). Following the failure of SVB and Signature, liquidity fears spread among the entire banking industry — with a particular focus on uninsured deposit balances and high commercial real estate exposure, which these institutions all have to varying degrees. However, we have rigorously reevaluated each banks’ balance sheet and fundamentals in the wake of the volatility and feel comfortable with our current positioning. We believe the market overreacted to SVB’s failure, dragging down shares of institutions that are meaningfully differentiated and which — at this point — seem relatively unlikely to encounter similar solvency concerns. While we will remain vigilant in evaluating any new information which could alter our theses for any of these institutions, for now, we are maintaining our exposure.”
7. SPDR S&P Bank ETF (NYSEARCA:KBE)
5-Year Price Performance: -24.8%
Total Net Assets as of September 25, 2023: $1.32 billion
Expense Ratio: 0.35%
Number of Holdings: 90
SPDR S&P Bank ETF (NYSEARCA:KBE) provides exposure to regional banks as part of its broader portfolio of bank stocks. The ETF launched in November 2005 tracks the S&P Banks Select Industry Index, which represents the bank sub-industry of the S&P Total Market Index. Overall, the ETF provides 65% exposure to regional banks. The top 10 holdings of the SPDR S&P Bank ETF (NYSEARCA:KBE) have a weightage of 16.60%.
6. Vanguard Financials Index Fund (NYSEARCA:VFH)
5-Year Price Performance: 13.7%
Total Net Assets as of September 25, 2023: $9.37 billion
Expense Ratio: 0.10%
Number of Holdings: 394
Vanguard Financials Index Fund (NYSEARCA:VFH) provides 7% exposure to regional banks. The ETF, launched in February 2004, tracks the MSCI US Investable Market Financials 25/50 Index, which represents large, mid-cap, and small-cap stocks across the financial sector. Two of the biggest industries the ETF provides exposure to are Transaction and Payment Processing Services and Diversified banks. Both the sectors have an individual weight of 18.60%.
In addition to these ETFs, Bank of America Corporation (NYSE:BAC), Citigroup Inc. (NYSE:C), JPMorgan Chase & Co. (NYSE:JPM), and Wells Fargo & Company (NYSE:WFC) are some of the notable names providing exposure to the financial and banking sector.
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Disclosure: None. 10 Best Regional Bank ETFs is originally published on Insider Monkey.