Politicians in Washington finally managed to arrive at a last-minute deal to avoid the disaster, even though the solution is only a temporary one. The stock market rejoiced the deal, more so because the fiscal uncertainty will most likely prevent the Fed from scaling back the monetary stimulus anytime soon.
Leaving the budget battles and debt-ceiling debate behind, the market is now focused on earnings. Third quarter earnings have been a mixed bag so far, but at the same time, investors are clearly rewarding stocks and sectors that have been beating or are expected to beat earnings estimates. One easy way to identify sectors with improving earnings prospects is to look at Zacks Industry ranks, which are based on earnings estimates revisions.
And a good way to achieve exposure to those sectors is to invest in ETFs that have earned top Zacks ranks, based on their potential to outperform their peers. (Read: High-Quality ETFs for Long-Term Performance)
SPDR KBW Regional Banking ETF (NYSEARCA:KRE)
Finance has been the earnings growth leader this year and the sector has not disappointed so far in the third quarter. Per Zacks Earnings Trends, Finance sector earnings for the 60.1% of the sector’s total market capitalization that have reported already, are up +13.0%. And, while the growth momentum is slowing, they are expected to deliver a double-digit earnings growth in the fourth quarter as well. Finance is currently #9 (out of 62) on the Zacks M (medium level) industry list.
Within the broader financial sector, I prefer regional banks. Most of the larger banks are hit by stringent regulatory requirements, falling trading revenues and costly settlements. Regional banks have been leading the sector most of this year as they were the main beneficiaries of steepening yield curve and rising rates. Then, they were big sufferers of the no-taper shocker.
But interest rates are expected to rise from the current levels when the taper-talk returns, benefiting regional banks.
Further, many of the regional banks are seeing a pick-up in commercial lending, which will partly offset the effect of decline in mortgage business.
KRE is the most popular regional banking ETF, with more than $2.3 billion in assets under management. The ETF holds 81 stocks in its portfolio, mostly small and mid caps. The fund uses an equal weight methodology, so company-specific risk is largely eliminated as no single company makes up more than 1.7% of the asset base.