A Guide to Investing in Regional Bank ETFs

Regional bank ETFs, like the SPDR S&P Regional Banking ETF (KRE), have returned to the spotlight.

This is because small and mid-sized banks are sensitive to the worries currently on investors' minds: economic downturns, interest rate fluctuations and loan losses. They also face competition from larger banks and fintech companies and are vulnerable to depositor confidence shocks, as demonstrated in the 2023 crisis.

In that crisis, a sudden loss of confidence triggered bank runs at three mid-sized U.S. banks, causing their collapse and raising fears of wider contagion.

While KRE is up 30% since the broad tariff pause began three months ago, the second half of 2025 may bring about a return of inflation-related risk for regional banks.

In this guide, we dive into how regional bank ETFs work, what bank stocks they hold and the associated pros and cons of investing in them in 2025.

What Is a Regional Bank ETF?

A regional bank ETF is an exchange-traded fund that aims to track the performance of an index comprised of regional bank stocks. Regional banks are financial institutions that operate within a specific geographic region, often serving local communities and smaller markets compared to national banks.

Therefore, a regional bank ETF provides investors with a way to gain low-cost, diversified exposure to a portfolio of regional bank stocks without having to individually select and purchase these stocks. 

What Stocks Do Regional Bank ETFs Hold?

Regional bank ETF stock holdings primarily consist of U.S. regional banks, such as savings and loan banks or credit unions, that operate within a specific geographic region and with assets ranging from $10 billion to $100 billion.

Here are a few examples of regional bank stocks held in regional bank ETFs: 

• EastWest Bancorp Inc. (EWBC)
• Citizens Financial Group Inc. (CFG) 
• Truist Financial Corp. (TFC) 
• Zions Bancorp. N.A. (ZION)
• Regions Financial Corp. (RF)

Regional Bank ETF List Ranked by Assets

Data as of July 8, 2025. Note that DPST is a leveraged ETF, which is much riskier than a traditional exchange-traded fund.

The 2023 Regional Banking Crisis and ETFs

The 2023 regional banking crisis led to the failure of a number of banks, most notably Silicon Valley Bank (SVB) and First Republic Bank (FRCB). Regional bank ETFs took a significant hit after the crisis. For example, KRE fell by more than 30% in the weeks following the collapse of SVB.

The decline in regional bank ETFs was also part of a broader selloff in the stock market as fears of contagion quickly reverberated through the financial sector and beyond. Investors were worried about the global economy and the potential for a recession, which led to selling pressure across all asset classes.

Despite interventions, the event rattled the industry and prompted calls for stricter regulations and deposit insurance reform. 

However, once the crisis appeared contained, KRE and other regional bank ETFs significantly recovered. From its post-crisis low on May 4, 2023, through July 7, 2025, KRE was up nearly 75%, but it remained nearly 20% below its all-time high set in January 2022.

The Pros & Cons of Investing in Regional Bank ETFs

Regional bank ETFs provide investors with many potential benefits, including long-term growth, but investors should also consider the associated risks, including interest-rate risk and regulatory risk.

Here are some of the pros and cons of investing in regional bank ETFs.

Pros

• Potential for growth: Regional banks can be a good investment if you believe that the economy is going to grow. This is because regional banks tend to do well when the economy is growing, as they can lend more money and earn more profits.
• Diversification: Regional bank ETFs offer diversification by investing in a basket of regional banks. This can help reduce risk, as it is less likely that all of the banks in the ETF will experience problems at the same time.
• Liquidity: Regional bank ETFs are typically very liquid, which means that they can be easily bought and sold. This can be important for investors who need to access their money quickly.
• Low fees: Regional bank ETFs typically have low fees compared to actively managed funds, which can help boost returns.

Cons

• Interest-rate risk: Regional bank ETFs are exposed to interest-rate risk, which is the risk that the value of the ETF will decline if interest rates rise or remain high for several quarters. This is because higher interest rates increase the cost of borrowing and can place strain on smaller banks’ ability to lend.
• Credit risk: Regional bank ETFs are also exposed to credit risk, which is the risk that a borrower will default on a loan. This can lead to losses for the ETF if a bank’s borrowers default on large loans.
• Liquidity risk: Regional bank ETFs can be illiquid in times of market stress. This means that selling your shares at a fair price may be difficult.
• Regulation risk: Regional bank ETFs are exposed to regulatory risk, which is the risk that new regulations will be implemented that negatively affect the performance of the ETF.

KRE, 2025 Regional Bank Stock Outlook

The outlook for regional bank stocks, and by extension ETFs like KRE, in the second half of 2025 presents a nuanced picture, balancing ongoing challenges with potential catalysts. A key area of concern remains commercial real estate (CRE) exposure, particularly office properties, where a substantial volume of loans is set to mature this year. 

While the broader CRE market shows cautious optimism, some experts warn that the roughly $957 billion in loans maturing in 2025 could lead to refinancing challenges and higher delinquency rates, especially for office properties. This could pressure regional banks, which often have significant CRE portfolios.

On the interest rate front, the Federal Reserve's cautious stance, balancing inflation and growth, suggests potential for mild rate cuts in late 2025, possibly starting in September. While lower rates can reduce banks' funding costs, they could also compress net interest margins (NIMs) if loan demand doesn't accelerate significantly. Deposit growth is expected to remain sluggish, further challenging funding for some institutions.

However, there are potential tailwinds. Some analysts anticipate a rebound in merger and acquisition activity within the financial sector, which would potentially benefit regional banks by driving valuations. A more business-friendly regulatory environment under the current administration might also offer some relief. 

Ultimately, regional banks' performance will largely hinge on the trajectory of the U.S. economy, whether it experiences a soft landing or a more pronounced slowdown, and how effectively they manage their loan portfolios amid evolving interest rate and commercial real estate dynamics.

Bottom Line

Regional bank ETFs have significant growth potential over the long term; however, they may face more downside pressure in the short term, especially if the economy continues to slow while interest rates remain elevated. Therefore, with a long-term outlook and high tolerance for risk, an investor may consider a new position after understanding the potential for short-term volatility.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investing in ETFs involves risks, and investors should carefully consider their investment objectives and risk tolerance before making any investment decisions.

At the time of publication, Kent Thune did not hold a position in any of the aforementioned securities.