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.
KRE has a gross expense ratio of 0.35 and a three-month average daily trading volume of 4.1 million shares. KRE's high liquidity is helpful for investors looking to quickly move in and out of this fund. IAT has a gross expense ratio of 0.48% and a three-month average daily trading volume of 125,000 shares. While KRE is an effective tool to gain cheap exposure to regional banks while mitigating risk, some investors benefit from a more actively managed strategy. David Ellison, manager of FBRSX, understands crisis. The Fidelity veteran was at the helm of Fidelity Select Home Finance ( FSVLX) in the early 1990s, and Ellison's experience in separating winners and losers has helped again during the latest credit crisis. FBRSX has led many of its peers during the financial recovery, with Ellison's fund earning five stars from Morningstar. Ellison's eye for management and well-timed opportunities have helped to keep this fund in the plus column in 2010. Year to date FBRSX is up 4.39%. The fund's expense ratio is 1.50%. KRE may currently have better year-to-date returns, as well as less expensive fees, but this ETF will always be bound by its passive indexing strategy. While this methodology may be appropriate for active investors, hands-off investors may prefer the watchful eye of Ellison -- and be willing to pay for it.
Often, the most beneficial times to invest are those when it is difficult to do so. With news of bank closures still cluttering the airwaves, it is difficult to see past the immediate aftermath of the financial crisis. It is now, however, that investors potentially have the most to gain. Through a balanced approach like KRE, or a managed approach like FBRSX, investors can expose themselves to the upside of a recovering banking industry while mitigating risk. -- Wriitten by Don Dion in Williamstown, Mass.