Financial Sector Play: Large vs. Regional Banks (ETF: KBE, KRE)

bank2One trade I have been extremely bullish on is a long position on the KBW Bank Index (KBE) while  shorting the KBW Regional Bank Index (KRE).  This trade has worked out very well ever since I wrote on RealMoney’s Columnist Conversation with the trade.  The play is betting on the relative out-performance of the large cap banks compared to smaller regional banks.  The trade is unique in the sense that you are hedging your downside risk by shorting the Regional Bank Index, but profit when the spread widens.

In more detail, the KBE is an ETF of the 20 largest banking institutions in the U.S.  Players like Bank of America (BAC), Wells Fargo (WFC), J.P. Morgan, US Bancorp, and Bank of New York Mellon (BK) make up the top five holdings of the security.  The KRE ETF replicates the KBW Regional Banking Index, which is an equal weighted index of over 50 geographically diverse regional banking institutions.  Top players in the KRE include First Niagra Financial Group (FNFG), WestAmerica Bancorp (WABC), TCF Financial (TCB), Hudson City Bancorp (HCBK), and City National (CYN).

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