ETF Trends
ETF Trends

Financial stocks and sector-related exchange traded funds led the market rebound Wednesday as traders anticipate a favorable outcome in the annual Federal Reserve stress test results.

On Wednesday, the Financial Select Sector SPDR (NYSEArca: XLF) was up 0.8%, iShares U.S. Financials ETF (NYSEArca: IYF) gained 0.6% and Fidelity MSCI Financials Index ETF (NYSEArca: FNCL) was 0.4% higher. Year-to-date, XLF dipped 3.7%, IYF fell 2.6% and FNCL declined 2.6%.

Investors were fueling bets that financial sector stocks would become the next bull market leaders after a positive stress result would allow banks to raise dividends and initiate stock buybacks, reports John Melloy for CNBC.

Historical data may indicate that financials could see a bump once the Fed announces the results after the bell Wednesday.

According to Kensho data, XLF has increased an average 1.7% the first trading day after the results ever since the Fed began its post-financial crisis stress test in 2009, with Regions Financial (NYSE: RF), Capital One (NYSE: COF), Wells Fargo (NYSE: WFC) and Bank of America (NYSE: BAC) among the best performing companies, which make up a significant weight in financial ETFs. For instance, XLF includes RF 0.5%, COF 1.5%, WFC 8.6% and BAC 5.7%.

The financial sector has been lagging behind the broader market for years after the Fed forced banks to raise capital requirements in an attempt to obviate or at least diminish the effects of another financial crisis. Consequently, many banks were forced to cut back on value producing strategies for shareholders. [An ETF Idea for Rising Bank Dividends]

However, if the Fed gives the green light, U.S. banks could be strong enough to boost quarterly dividends 53% on average, issuing $109 billion over the next 15 months, reports Elizabeth Dexheimer for Bloomberg.

Investors, though, should still brace for a potential stress test failure. For instance, Bank of America stated that regulators demanded changes to some of its models, and Goldman Sachs (NYSE: GS) came close to failing its initial test last week. GS makes up 2.5% of XLF. [Bank ETFs Strengthen on Passing First Round Stress Tests]

However, Citigroup (NYSE: C) is expected to expand its dividend payouts as many anticipated the bank to have made drastic changes after failing its test on qualitative grounds last year. C makes up 5.3% of XLF.

Financial Select Sector SPDR

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

Full disclosure: Tom Lydon’s clients own shares of IYF.