Believing in Bank ETFs as Trump Looks to Scale Back Dodd-Frank LegislationThe Financial Select Sector SPDR (NYSEArca: XLF), the largest financial services exchange traded fund, and rival ETFs tracking the S&P 500’s second-largest sector allocation are surging and drawing plenty of fresh assets from investors.

Some analysts believe investors’ new found faith in the financial services sector will ultimately be rewarded. XLF and rival financial services ETFs have been bolstered this year after President Donald Trump revealed plans to scale back 2010 Dodd-Frank legislation, which increased regulations on banks and financial services companies following the global financial crisis.

Bank ETFs are benefiting from speculation that the Federal Reserve will boost interest rates multiple times this year. With a steepening yield curve or wider spread between short- and long-term Treasuries, banks could experience improved net interest margins or improved profitability as the firms borrow short and lend long.

“Deregulation in the financial industry, already in the works under President Donald Trump, could propel the banks even higher, Richard Bove of Rafferty Capital Markets said in a recent interview,” reports CNBC.

XLF is coming off one of its best annual performances since the global financial crisis. While the financial services sector, the second-largest sector allocation in the S&P 500, has some doubters after last year’s impressive rally, some market observers believe the sector can keep tracking higher this year.

According to Thomson Reuters, the combined profit of S&P 500 companies is projected to have returned 6.2% in the fourth quarter, largely due to improving results out of the financial sector.

“Bove’s remarks come on the heels of the resignation of top Federal Reserve official Daniel Tarullo, an advocate for regulation within the banking industry. Trump recently began the steps necessary to take down parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act, a piece of legislation that has more stringently regulated the goings on of the financial industry,” according to CNBC.

Bank ETFs are benefiting from speculation that the Federal Reserve will boost interest rates multiple times this year. With a steepening yield curve or wider spread between short- and long-term Treasuries, banks could experience improved net interest margins or improved profitability as the firms borrow short and lend long.

The Fed is believed to be targeting three rate hikes in 2017 while Fed funds futures data currently imply the U.S. central bank will boost borrowing costs twice this year.

For the week ended Feb. 15, XLF added $1.18 billion in new assets, a total surpassed by just one other ETF.

For more information on the financial sector, visit our financial category.

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