While the rest of the equities market plunged, bank stocks and sector-related exchange traded funds were partially supported by the notion that a Federal Reserve rate hike could help improve profit margins.
On Friday, the iShares U.S. Regional Banks ETF (NYSEArca: IAT) was down 0.4%, SPDR S&P Regional Banking ETF (NYSEArca: KRE) was 0.5% lower, PowerShares KBW Regional Bank Portfolio (NYSEArca: KBWR) fell 0.2 and First Trust NASDAQ ABA Community Bank Index Fund (NasdaqGM: QABA) dipped 0.4% after trading in the positive earlier in the day. QABA also saw trading volumes jump almost three times its daily average. Meanwhile, the S&P 500 declined 2.0%.
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Bank stocks found some support after the usually dovish Federal Reserve Bank of Boston President Eric Rosengren said that a “reasonable case can be made” for tightening interest rates to avoid an overheating economy, the Wall street Journal reports.
Trading volume was also elevated, which suggested that market players believe a rate hike is a real possibility.
“Today’s volume is notable because it shows people are putting money behind these moves,” Justin Wiggs, managing director in equity trading at Stifel Nicolaus, told the WSJ.
[related_stories]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