This week, the International Monetary Fund (IMF) encouraged the Federal Reserve to hold off on raising interest rates until 2016. Then came the May jobs report, which showed employers added 280,000 jobs last month, the biggest gain of the year. 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 Friday’s 4% gain, 10-year Treasury yields reside around 2.4%, potentially indicating more pain ahead for bonds.
Another sign that markets are pricing in higher interest rates is today’s action in bank stocks and exchange traded funds. To this point in Friday’s session, 14 ETFs have made new 52-weel highs, according to Barchart, and eight of those 14 are financial funds, including the First Trust NASDAQ ABA Community Bank Index Fund (NasdaqGM: QABA).
Actually, QABA is in the all-time high club today, one of a small number of ETFs to accomplish that feat, and is higher by 5.3% over the past month. Home to just $72.2 million in assets under management, QABA is not considered a benchmark financial services ETF, but the six year old fund is one to watch for clarity on interest rates because community banks, like their larger regional counterparts, are positively correlated to upside movement in interest rates. [A Look at Community Bank ETFs]
QABA’s three-year standard deviation and beta are slightly below that of the S&P Composite 1500 Financials Index and banks “must meet certain operating history, solvency, and financial statement requirements to remain eligible for inclusion in the index,” according to First Trust. Constituent companies must have market values of at least $200 million and average daily volume of at least $500,000.