If the central bank does decide to raise interest rates, the market could see a steeping yield curve. With a steepening yield curve, or wider spread between short- and long-term Treasuries, banks could also experience improved net interest margins or improved profitability as the firms borrow short and lend long.

The lower interest rates have been damaging to banks, notably core banking profitability ratios. Consequently, an interest rate hike may signal a potential peak to the banking sector’s woes.

SEE MORE: Small-Cap Bank ETFs Shine as Wall Street Languishes

Moreover, a rising interest will reflect strength in the U.S. economy. The resilience of the U.S. economy and consumers will benefit smaller banks, along with related regional and community bank-related ETFs.

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

First Trust NASDAQ ABA Community Bank Index Fund

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