In one of this year’s most impressive laggard-to-leader stories, financial services exchange traded funds, including the Financial Select Sector SPDR (NYSEArca: XLF), are rallying on expectations that the Federal Reserve will raise interest rates for the first time this year later this month.
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.
Moreover, the financial sector received a boost from Presidential candidate Donald Trump after he proposed dismantling nearly all of Dodd-Frank, the package of financial reforms placed after the global financial crisis.
Although ETFs such as XLF and more focused plays, including the SPDR S&P Regional Banking ETF (NYSEArca: KRE), the largest regional bank-related ETF, along with the iShares U.S. Regional Banks ETF (NYSEArca: IAT) and PowerShares KBW Regional Bank Portfolio (NYSEArca: KBWR), have recently been soaring, some analysts are forecasting more upside for bank stocks.
“I think what you’ll find is the bank stocks are still very inexpensive relative to the market. I think people are going to continue with this rally assuming, of course, the Fed raises rates, which we think could come in July,” RBC Capital Markets banking analyst Gerard Cassidy told CNBC on Tuesday.