The May jobs report, which showed employers added 280,000 jobs last month, delivered the biggest employment gain of 2015. The unemployment rate fell to 5.4% from 5.5%.
Those headlines renewed calls for the Fed to boost borrowing costs this year with Fed funds futures showing a 53% chance of that happening following the central bank’s October meeting. With 10-year yields on the rise, financial services exchange traded funds have some positive catalysts with which to work.
Although June is usually a rough month for the sector, financial services stocks and ETFs got a lift last Friday thanks to the jobs report and subsequent rate hike speculation. That includes the $352 million PowerShares KBW Bank Portfolio (NYSEArca: KBWB), which gained 1.8% last Friday. [Bank on Bank ETFs]
“Bank stocks often display a positive correlation to interest rates, and the Taylor Rule suggests that the fed funds rate is more than 200 basis points (2.00%) below its equilibrium rate, using a real fed funds rate of 2.00%, an inflation target of 2.00% and a target unemployment rate of 5.00%.1 This indicates that interest rates should move higher, and an increase in rates is expected to improve bank net interest margins,” according to a recent PowerShares research note.
KBWB often goes overlooked in the world of financial services ETFs, though that should not be the case if for no other reason than that the fund tracks the widely followed KBW Bank Index (BKX). KBWB’s top 10 holdings, a group including Dow component J.P. Morgan Chase (NYSE: JPM), Wells Fargo (NYSE: WFC), Citigroup (NYSE: C) and Bank of America (NYSE: BAC), combine for over 60% of the ETF’s weight.