Near-Term Caution on Bank ETFs

The Financial Select Sector SPDR (NYSEArca: XLF), Vanguard Financials ETF (NYSEArca: VFH) and rival financial services ETFs have been among the most obvious beneficiaries of Donald Trump’s shocking victory in last week’s presidential election.

In the case of XLF, the largest financial services ETF, that fund is higher by nearly 5% over the past week, bringing its one-month gain to over 12%. Some financial services and dedicated bank ETFs have performed even better than that in the seven trading sessions since Election Day, but the rapid runup in the S&P 500’s second-largest sector weight has some market observers waxing near-term cautious on the group.

SEE MORE: Bullish Signs for Bank ETFs

Those cautious comments come ahead of a possible interest rate hike by the Federal Reserve next month, a move that many believe would be a boon for regional bank stocks and ETFs. 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.

Heading into this year, many market observers expected four Fed rate hikes, a number that subsequently dropped to two and now, in the eyes of some experts, zero. Higher interest rates would help widen the difference between what banks charge on loans and pay on deposits, which would boost earnings for the financial sector.

Related: Financial Sector ETFs Maintain Momentum

“The postelection bank rally has ‘largely discounted potential benefits from rising interest rates, lower tax rates and more aggressive capital return. We believe investors should book gains and wait for more evidence that the structural improvements in macro trends and regulations will materialize,’ according to the note written by Baird analyst David George,” reports CNBC.