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By Scott Burns | 01-13-2010 03:32 AM

The Best ETF Sector Idea for 2010

Director of ETF Analysis Scott Burns sees regional banks as the best bet for 2010.

Scott Burns: The best sector ETF pick for 2010? My money is on regional banking. Hi there. I'm Scott Burns, Director of ETF Research for Morningstar. And I think that the best sector ETF pick for 2010 is going to be SPDR KBW Regional Banking, ticker KRE.

Joining me to help explain what's going on in regional banking and what's back my thesis is Morningstar Associate Director of Banks and Financials, Matt Warren. Matt, thanks for joining me.

Matt Warren: Good to be here.

Burns: Well, before we get into what's on the outlook for 2010, let's talk about 2009 a little bit in regional banking. And actually, 2009 was really a down year for the regional banking sector. The sector as a whole posted a negative 20% return. While when we look at broader financial sector ETFs, they actually had a positive 20% return. So, it was a pretty big split.

What happened there? What's some of the explanation to that?

Warren: Sure. If you look at the biggest banks, they got crushed very soon in the cycle, very early, because they had a lot of securities that had to be written down. They had a lot of consumer exposure that hits first. So, they had really gotten dinged first.

Whereas, the regional banks, they tend to have more commercial exposure, more commercial real estate exposure that kind of lags and those are the problems that we're seeing develop now more so.

Burns: So it was really more of an issue that the broader banks took a lot of their pain in 2008. The regional banks didn't start to feel that until 2009.

Warren: That's right. Plus too, the larger banks are benefiting from their investment banking units. Which profitability actually increased quite a bit after Lehman and Bear Stearns and some other capacity was taken out of the system.

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