A financial sector exchange traded fund attracted record inflows Thursday as a steepening yield curve and speculation of financial deregulation in the wake of Donald Trump’s victory helped spur demand for bank stocks.
The Financial Sector ETF has been the second most popular ETF for the past week, bringing in close to $2.6 billion in net inflows. Meanwhile, XLF has jumped 10.5% over the past week, outpacing the broader S&P 500’s 3.9% gain.
“Financial ETFs are taking off like a rocket after Trump’s win, getting a double boost from deregulation and rising rates,” Eric Balchunas, ETF analyst at Bloomberg Intelligence, said.
Trump’s official transition website stated that the “financial Services Policy Implementation team will be working to dismantle the Dodd-Frank Act,” which was signed into law by President Barack Obama in 2010 to obviate another financial downturn. The law increased the burden of banks to safe guard against another meltdown event and forced many to greatly reduce exposure to riskier assets, which have also dragged on the financial sector’s bottom line.[related_stories]
“Does a dog move faster when it’s on a leash or off the leash?” Neil Dutta, head of U.S. economics at Renaissance Macro Research, asked. “The market sees the banking industry as a dog off its leash.”
Meanwhile, the steepening yield curve, with yields on benchmark 10-year Treasuries up to 2.12%, also helped bolster the financial sector outlook. The widening spread between yields on short- and long-term debt helps support net interest margins and profitability on loans for banks.
Treasury prices have declined while yields jumped in response to rising inflation expectations after Trump’s inflationary proposals. For instance, Trump has promised protectionist trade policies, enhanced public spending and tax cuts during the campaign trail.
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Financial Select Sector SPDR