Investors Are Losing Patience With This Regional Bank ETF

Nearly eight months into 2017, investors that pay attention to sector-level trends know that financial services stocks are lagging. The Financial Select Sector SPDR XLF is up about 6 percent year-to-date, well off the 9.5 percent returned by the S&P 500.

Things are worse for regional bank stocks and the corresponding exchange traded funds... much worse. Just look at the SPDR S&P Regional Banking ETF KRE.

KRE, the largest ETF dedicated to regional bank stocks, is off more than 7 percent this year. The benchmark regional bank ETF is lower by more than 4 percent over just the past month.

Things weren't supposed to be this way in 2017 for regional bank funds. Few, if any, industry groups are as positively correlated to rising interest rates as are regional banks. The Federal Reserve has boosted borrowing costs twice this year with plans for another before year-end, yet KRE and friends are flailing.

Losing Patience

Data suggest investors are losing patience with KRE and giving up on the idea that another Fed rate hike will be of assistance to the ETF.

“KRE remains the largest Regional Banking focused ETF in the landscape in spite of the recent outflows, and with its north of $3 billion in AUM it is nearly three times the size of its next largest rival in the segment,” said Street One Financial Vice President Paul Weisbruch in a note out Tuesday.

As Weisbruch notes, KRE has lost $275 million in assets in recent sessions, bringing its year-to-date outflows to just over $228 million. What that says is that investors, for the most part, stuck by KRE this year until recent weeks. By comparison, XLF has seen year-to-date inflows of over $1 billion.

For The Bears

“When we see flows into or out of KRE we typically think of them as a sector bet more so than anything company specific nor earning related, when on the other hand traders and portfolio managers will often use XLF and XLF options around the earnings reports of the major money center banks that populate the underlying index,” said Weisbruch.

Risk-tolerant traders looking to make short-term, bearish bets on regional banks should consider the Direxion Daily Regional Banks 3X Bear Shares WDRW. WDRW looks to deliver three times the daily inverse returns of the same index KRE tracks.

There are some incremental signs traders are starting to acknowledge WDRW. For the five trading days ended Aug. 21, the ETF's volume was nearly 15 percent above the trailing 20-day average, according to Direxion data.

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Disclosure: The author owns shares of XLF.