NEW YORK (TheStreet) -- ETFs that track regional bank stocks have been soaring lately as investors bet that rising interest rates will improve the banks' profitability.
But if you're thinking of joining the party, be aware that not all exchange traded funds with "regional bank" in their names are alike.
The iShares U.S. Regional Banks ETF ( (IAT) - Get Report ) illustrates why peeking under the hood is necessary. Home to $464.2 million in assets under management, the iShares U.S. Regional Banks ETF purports to be a regional bank fund, but super regional might be the more accurate description.
IAT's top 10 holdings, a group that combines for over 60% of the fund's weight, includes US Bancorp ( (USB) - Get Report ), PNC Financial ( (PNC) - Get Report ) and BB&T ( (BBT) - Get Report ). No those banks aren't the size of a Wells Fargo ( (WFC) - Get Report ) or a J.P. Morgan Chase ( (JPM) - Get Report ), but they're far from small or mid-sized regional banks that operate in just two or three states.
Why does this matter? Bigger regional banks, such as US Bancorp and PNC, have more diverse business lines than their smaller counterparts and that can mute the positive impact of rising rates. For example, PNC has capital markets and commercial real estate operations. Smaller regionals that focus on lending are more sensitive to interest rate changes because as rates increase, so do profit margins.
Big exposure to super regionals is affecting IAT's performance. As 10-year Treasury yields have surged 24.6% over the past six months, the iShares U.S. Regional Banks ETF is up 13.1%.
Impressive, but a better option is the SPDR S&P Regional Banking ETF ( (KRE) - Get Report ), the largest regional bank ETF. KRE equal weights its 94 holdings, meaning each stock carries approximately the same weight within the fund as the others. That also helps mitigate single-stock risk.
While IAT and KRE share several of the same holdings, KRE lacks exposure to super regionals like BB&T and US Bancorp, giving investors purer access to true regional banks. With Treasury yields rising, KRE is outperforming its rival with a six-month gain of nearly 16%. History shows the gap in returns between these two funds is no fluke. When 10-year yields jumped in 2013, KRE finished that year up 47% while IAT gained 38%.
Investors can also consider the SPDR S&P Bank ETF ( (KBE) - Get Report ). Though it is not a dedicated regional bank fund, the SPDR S&P Bank ETF is pretty close with nearly 78% of its weight devoted to regional banks. The rest of the fund's holdings are spread among diversified banks, capital markets firms and thrifts, among others. Like the SPDR S&P Regional Banking ETF, the SPDR S&P Bank ETF is an equal-weight fund. Tilting toward regional banks with a dash of financial services names has helped KBE climb 16.5% over the past six months.
As for where investors are putting money to work with regional bank funds, flows data paint a clear picture. Since the start of the second quarter, $129 million has been pulled from IAT, but KRE and KBE have added $868.5 million and $685 million, respectively, in new assets, according to ETF.com data.