In 2025, Catherine Mealor, Wall Street analyst at Keefe, Bruyette & Woods (KBW), declared 2026 a “banner year” for regional banks. Despite the optimistic outlook, regional bank ETFs such as the SPDR S&P Regional Banking ETF (KRE) and iShares U.S. Regional Banks ETF (IAT) have remained under pressure three months into 2026.
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Mealor’s 2026 Regional Bank Outlook Vs Today’s Performance
Mealor cited three structural drivers for regional banks in 2026. Firstly, she highlighted accelerating loan growth following the 2025 delay due to tariff-related uncertainty. Secondly, she suggested that a steeper yield curve could help regional banks “pull away” from larger peers by expanding net interest margins (NIM), as short-term rates remain below long-term rates.
Lastly, Mealor mentioned an increase in merger and acquisition (M&A) activity, driven by regulatory easing under the current U.S. administration, as banks scale for tech investments and succession planning.
Despite these bullish catalysts, data from TipRanks show continued weakness in regional bank ETFs, with KRE down 3.16% over the past three months while IAT has declined by roughly 6.36% over the same period. Both funds have also recorded drawdowns of roughly 15–16% from February peaks, alongside recent outflows, signaling sustained investor caution.
Why Regional Bank ETFs Are Underperforming This Year
Several factors challenge Mealor’s expectations for regional banks in 2026. Loan growth remains uneven, as roughly $875 billion in maturing commercial real estate (CRE) debt in 2026 will likely steer banks’ activity toward refinancing. Meanwhile, cautious business sentiment amid rising geopolitical tensions and a recent 40% surge in crude oil prices further dampens new loan growth for regional banks.
Furthermore, deposit costs remain elevated after the Federal Reserve’s March 2026 decision to hold rates at 3.50%–3.75%, keeping NIM under pressure despite a notable steepening of the yield curve. M&A activity has also faced uncertainty, as Federal Reserve Board Governor Michael Barr noted that proposed changes to stress tests and Basel III rules could weaken banks’ resilience, with the impact weighing more heavily on smaller banks.
KRE and IAT Performance Against Broader Regional Bank ETFs in 2026
Despite sector-wide pressure, the regional bank ETFs continue to show relative resilience. KRE posted a slight 1.66% year-to-date decline, while IAT has restricted its losses to around 5.01%.
Both ETFs are holding up better than expected, suggesting that some holdings within these funds are outperforming peers. It also underscores the selective strength of regional lenders even as the broader banking sector remains under pressure.
What is the Best Regional Bank ETF?
According to TipRanks ETF Center, some of the top regional bank ETFs include the SPDR S&P Regional Banking ETF (KRE), iShares U.S. Regional Banks ETF (IAT), and Invesco Bloomberg Financial Data ETF (FDIQ), all of which carry a “Moderate Buy” consensus rating from Wall Street analysts.
KRE currently shows 97 Buy, 52 Hold, and 2 Sell ratings across 151 holdings, while IAT posts 24 Buy, 7 Hold, and 0 Sell ratings across 31 holdings. These ratings suggest investors could still find opportunities in the funds’ individual holdings, despite ongoing headwinds.
