2 Ways to Invest in a 'Soft Landing' for Stocks

The Federal Reserve is walking a tightrope, trying to tame inflation without sending the economy into a tailspin. This delicate dance has everyone in the stock market on high alert, especially when it comes to bank stocks. As the idea of a "soft landing" remains plausible - but not guaranteed - regional banks are one group that could be big winners if the Fed keeps its policy moves on target.

Mike Mayo, a highly regarded bank analyst at Wells Fargo, notes that bank stocks historically outperform the broader equities market in the initial months after a Fed rate cut. Regional lenders, which were hit particularly hard by the high interest-rate regime, have already been prepping their balance sheets for that long-awaited September rate cut, and Eric Wallerstein of Yardeni Research predicts, "There will likely be a regional bank catch-up trade." 

So, how can you get in on this potential action? Exchange-traded funds (ETFs) are great ways to invest in regional banks - namely, the iShares U.S. Regional Banks ETF (IAT) and the SPDR S&P Regional Banking ETF (KRE). These funds offer a smart way to tap into the regional banking group, which could be set for a turnaround as rates come back down. 

iShares U.S. Regional Banks ETF

The iShares U.S. Regional Banks ETF (IAT) offers investors a focused approach to capturing the performance of small- and mid-cap regional banks in the United States. Launched on May 1, 2006, and managed by BlackRock (BLK)  IAT aims to track the investment results of an index composed of U.S. equities in the regional banking sector, providing exposure to small and mid-sized banks across the country. This ETF provides targeted access to domestic and regional bank stocks, making it an attractive option for those looking to express a sector view in financial services. 

IAT has managed a year-to-date return of 10.3%, and is up 32% over the past year. That compares to returns of 13.4% and 21.1% for the S&P 500 Index ($SPX) over the same periods, respectively.

The fund has $642.1 million in assets under management (AUM) and maintains an expense ratio of 0.39%, making it a cost-effective option for investors seeking exposure to regional banks. Additionally, IAT offers an annual dividend yield of 3.44%, paid quarterly at a rate of $0.34 per share - providing a steady income stream alongside capital appreciation potential. 

IAT's portfolio is relatively concentrated, comprising 40 holdings, with the top 10 accounting for a substantial 68.8% of the fund's assets. This concentration underscores the fund's strategic focus on key players in the regional banking sector. 

The largest holdings include PNC Financial Services Group (PNC) (14.01%), U.S. Bancorp (USB) (13.97%), Truist Financial Corporation (TFC) (11.30%), Fifth Third Bancorp, (FITB) (5.31%), and First Citizens Bancshares (FCNCA) (4.54%). Such a concentrated portfolio can offer both risks and rewards, as it allows for significant exposure to the performance of these leading institutions.

SPDR S&P Regional Banking ETF (KRE)

The SPDR S&P Regional Banking ETF (KRE) is a well-known choice for investors seeking exposure to the regional banking sector. KRE offers a unique approach to capturing the dynamics of this market segment. Launched on June 19, 2006, KRE aims to closely match the returns and characteristics of the S&P Regional Banks Select Industry Index. This ETF employs an equal-weight strategy, ensuring that each stock in the portfolio is given approximately the same weight. This helps mitigate concentration risk and provides a more balanced exposure across the sector.

KRE has also lagged the broader market in 2024, up just 4.6% on a YTD basis. Over the past 52 weeks, KRE is up 25.9%.

With total AUM of approximately $3.35 billion, KRE is a substantial player in the ETF market. It maintains a competitive net expense ratio of 0.35%, which is relatively low, making it an attractive option for cost-conscious investors. Additionally, KRE offers a dividend yield of about 2.82%, with the last quarterly dividend paid being $0.39 per share, reflecting its potential for generating income alongside capital appreciation.

The equal-weight approach of KRE not only reduces concentration risk but also allows investors to benefit from the performance of smaller regional banks that might otherwise be overshadowed in a market-cap-weighted index. This strategy can be particularly advantageous in times of economic recovery or interest rate adjustments, where smaller banks may exhibit stronger growth potential.

KRE's portfolio is diverse, comprising a broad array of stocks, yet its top holdings still make up a significant portion of its assets. Notable holdings include Columbia Banking System, Inc. (COLB) (2.49%), Western Alliance Bancorp (WAL) (2.41%), Valley National Bancorp (VLY) (2.26%), Synovus Financial Corp. (SNV) (2.24%), and Zions Bancorporation (ZION) (2.22%). These selections reflect the ETF's commitment to providing diverse, comprehensive exposure to the regional banking sector.

Conclusion

Regional banks are shaping up to be potential winners in a "soft landing" scenario. For investors looking to add exposure as net interest income approaches a potential inflection point, he iShares U.S. Regional Banks ETF (IAT) and the SPDR S&P Regional Banking ETF (KRE) are two solid ways to get in on the action. IAT's got a more focused approach, while KRE spreads the love with its equal-weight strategy. For anyone considering possible rate-cut investments, these ETFs are worth a serious look.