Regional Bank ETFs: Don't Mess With Texas

Financial services ETFs of all stripes have been standout performers this year.

The Financial Select Sector SPDR XLF, the largest financial services ETF by assets, is 27.9 percent year-to-date.

That is all fine and dandy until XLF is measured against the SPDR S&P Regional Bank ETF KRE.

KRE has surged 35.2 percent this year. Said another way, XLF, an ETF chock full of stocks like J.P. Morgan Chase, Citigroup C and Goldman Sachs GS has been crushed by ETFs like KRE that hold stocks many Americans have never heard of.

Related: Regional Bank ETFs Still Have Plenty of Upside.

Indeed, regional bank ETFs such as KRE and unheralded rivals such as the the PowerShares KBW Regional Banking Portfolio KBWR make good on "regional" being in their names. That is to say investors should not expect to find Bank of America BAC or Wells Fargo WFC hiding in either fund.

So what region, or more specifically, is really helping drive returns for KRE, KBWR and friends? Texas. It is widely known that the Lone Star State is home to one of the best economies in the nation. It is undoubtedly the best among large states, much to the chagrin of some Californians and New Yorkers.

Last month, the Federal Reserve's Beige Book survey classified only one of 12 regions as "strong." That was Dallas. The unemployment rate in Texas is 6.5 percent, well below the national average. Texas added one new job for every three people from 2000 to 2013, while the nation added one job for every seven people, Forbes reported last month.

Soaring oil output at the Eagle Ford Shale and Permian Basin have helped boost the economy in nation's second-largest state, but so have a strong manufacturing sector and the oft-touted low cost of living.

Those factors have helped lift shares of banks doing business in Texas and not just the Wells Fargos and Bank of Americas of the world. At least 10 of KRE's 79 holdings have branches or offices in Texas. The $2.26 billion KRE is essentially an equal-weight ETF, so no single stock dominates the fund, but add up 10 holdings and one arrives at a decent-sized slice of KRE's total pie.

KRE's Texas lineup includes banks such as Cullen Frost CFR, Prosperity Bancshares PB, Texas Capital BancShares TCBI and BOK Financial BOKF. Overall, a minimum of 14 percent of KRE's weight has exposure to Texas.

The PowerShares KBW Regional Banking Portfolio, which is up more than 28 percent year-to-date, features five holdings that do business in Texas. That roster includes BOK Financial, Texas Capital and Prosperity. Those five stocks combine for nearly 10 percent of the ETF's weight.

Do not forget the iShares U.S. Regional Banks ETF IAT. While IAT is heavy on super-regionals such as US Bancorp USB and PNC Financial PNC, it does hold some of the smaller, aforementioned regional banks.

IAT top-10 holdings such as SunTrust STI, BB&T BBT, Regions RF and Comerica CMA all have significant Texas footprints. Comerica is even based there. Those stocks combine for 19 percent of IAT's weight. Banks that are either based in Texas or operate there combine for roughly a quarter of IAT's weight. Not coincidentally, the ETF is up nearly 26 percent this year.

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