NEW YORK ( TheStreet) -- Large financial institutions like JP Morgan Chase ( JPM) and Goldman Sachs ( GS) have bounced back harder than many of their regional banking peers, a trend reflected in their respective ETFs. While large-cap oriented funds iShares Dow Jones US Financial Services ( IYG) and SPDR KBW Capital Markets ( KCE)have risen 23% and 49% year to date, regional peers like iShares Dow Jones US Regional Banks (IAT) and SPDR KBW Regional Banking KRE have fallen 10% and 24% respectively. As a broad sector, financials have recovered substantially from March lows, but certain sub-sectors continue to lag others as investors recover from widespread market downturn. Earnings announcements from big banks like JP Morgan, Bank of America ( symbol), Wells Fargo ( WFC), Goldman Sachs, and Citigroup ( C) could help to further separate the big boys from the rest of the pack. J.P Morgan's Wednesday earnings announcement underscored the improvement for large financial institutions. Despite problems with delinquencies in its consumer and credit-card operations, it reported strong profits in its earnings call. Pricey deposits from Washington Mutual and the recovery of leveraged loans and mortgage securities helped to fuel the $3.6 billion in posted profit. The banking sector, particularly small banks, still have a long road to recovery. During the Q&A portion of the earnings call, a representative from JPM fielded a call from analyst Meredith Whitney about the firm's exposure to commercial real estate. The representative noted: "Commercial real estate and the values have already dropped, and it's going to be recognized over the next couple of years. We believe you are seeing several hundred additional smaller regional based banks go -- you know, not make it."
Nearly 100 U.S. banks have already failed in 2009, including the seizure of three banks last week that brought the total to 98. There has been a correlation between size-of-underlying- banks and performance when it comes to regional banking ETFs KRE and IAT. While both ETFs cover the regional banking sector, IAT's portfolio is concentrated in larger super- regional banks as opposed to KRE's smaller banking sampling. KRE and IAT are a case of two similar sounding ETFs with different underlying portfolios. According to Morningstar, KRE has the bulk of underlying assets, more than 87%, allocated to small- and micro-cap firms. IAT has less than 23% allocated to small- and micro-firms, with the bulk of assets in large- and medium-cap firms. Large, liquid and balanced ETFs like KRE are a good way to add small-cap exposure to your portfolio. As smaller banks come under pressure, however, KRE's methodology has left the fund lagging IAT. In the year period ending Oct. 13, KRE fell 31.43% while IAT fell just 21.1%. Regional banks, and the ETFs that track them, could continue to feel pressure in the short term. Reserves accrued for losses could continue to cause write-downs as commercial real estate slumps. KRE's components may continue to lag IAT's as smaller banks fold. Before betting on IAT, however, investors should consider the fact that the fund's top five components, which comprise more than 44% of assets, could make the fund a volatile bet if one takes a turn for the worst. -- Written by Don Dion in Williamstown, Mass.