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Should You Follow Jim Cramer Into Regional Bank ETFs?

Stocks in this article: KRE KBE FLAT STPP RTH VIG PPH

NEW YORK ( ETF Expert) --Broad-based stock and bond ETFs have struggled throughout the final month of the secondnd quarter. However, some folks may have found a bit of refuge in the banking sector.

Can Banks Maintain Their Mojo?
Approx 1 Month %
First Trust NASDAQ Community Bank (QABA) 2.2%
SPDR KBW Regional Banking (KRE) 2.2%
iShares DJ Regional Bank (IAT) 1.9%
PowerShares KBW Regional Banking (KBWR) 1.8%
SPDR KBW Bank (KBE) 1.1%
iShares Total US Bond (AGG) -3.1%
SPDR S&P 500 Trust (SPY) -3.6%

The momentum play in banking appears rational. Yields on long-dated bond maturities have been skyrocketing while shorter-term maturities have not moved quite so dramatically. When the "yield curve" steepens in this manner, one might assume that banks will profit from the larger spread between short- and long-term interest rates; that is, they may borrow at ultra-low rates as well as lend out at much higher rates to businesses and consumers.

TheStreet's Jim Cramer is already touting the technical strength of funds like KBW Regional Banking (KRE) and SPDR KBW Bank (KBE). Looking at the current yield curve while ignoring future economic probabilities, however, may bite the momentum player in the backside.

If economic data sour in the months ahead (and I believe that it will), the markets will embrace the notion that the Federal Reserve cannot justify tapering its easing program. Does anyone really believe that the economy is currently capable of standing on its own? You can almost here Howard Cosell saying, "Down go Treasury yields! Down go Treasury yields!"

By way of review, Europe's endless recession shows little signs of improvement; higher yields in the region are already hindering the recovery hopes of French, Italian and Spanish citizens. China's manufacturing segment is contracting at the same time that its leaders have responsibly elected to refrain from easing with reckless abandon.

What's more, corporate earnings may already be in trouble, as negative pre-announcements by S&P 500 corporations are at their highest levels in 17 years (N/P is approximately 7.0).

Personally, I would hold off on over-weighting the financial sector. The easy money via the steepening of the yield curve has likely been "banked" already. The time to overweight financials on the steepening theme was at the start of May, rather than at the end of June, as evidenced by iPath U.S. Treasury Steepener ETN (STPP).

In my estimation, there will be a better opportunity to invest in equities that come in a wide variety of shapes and sizes. Nevertheless, if you're going to dollar cost average into stocks at this moment, dividend growth stocks and "non-utility non-cyclicals" are better for a summertime of 1%-2% price swings. Vanguard Dividend Growth (VIG), Market Vectors Retail (RTH) and Market Vectors Pharmaceuticals (PPH)are all on my radar screen.

Meanwhile, a "contrarian trader" might even be so bold as to think in terms of the yield curve flattening due to increasing risks of recession; he/she might choose to investigate iPath U.S. Treasury Flattener ETN (FLAT). It may not be realistic for my conservative clients, but active traders may choose to play the "contrary-to-popular-wisdom" angle.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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