NEW YORK ( TheStreet) -- Regional banks were a bright spot in a gloomy market last month, as fourth-quarter earnings helped to boost smaller banks showing continued improvement.
While bank closures are still keeping investors on their toes, both the SPDR KBW Regional Banking ETF (KRE) and Fidelity's FBR Small Cap Financial (FBRSX) offer solid exposure to this recovering sector.
On Monday, Credit Suisse analysts cited continuing improvement in net interest margins, non-performing loans and net charge-offs as reasons for optimism. "We still believe (regional banking) stocks have significant upside, around 80%, until mid 2012," analysts said .
Despite the potential upside, the 15 banks closed so far this year may deter otherwise interested investors. With the continued risk of individual banks imploding, investors are better off gaining exposure to this sector through an equal-weighted ETF or high-quality mutual fund.While several passive ETF strategies offer low-cost exposure to the regional banking sector, KRE is unique in its methodology. While other popular funds, like the iShares Dow Jones U.S. Regional Banks Index Fund (IAT), place large bets on top components, KRE offers nearly equal-weight exposure to its 52 holdings. By not staking more than approximately 2.5% in any single holdings, KRE's strategy helps to protect the overall portfolio from bank blow-ups. On the other hand, IAT's top 10 holdings account for nearly 63% of the fund. Top IAT holding US Bancorp (USB) makes up 19.46% of the portfolio. KRE's performance seeks to replicate the KBW Regional Banking Index. In addition to utilizing an equal-weighting methodology, KRE is designed to be cost-effective, have low portfolio turnover and accurate tracking.
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