Financial services exchange traded funds have been among the prime beneficiaries of Donald Trump’s victory in the U.S. presidential election and the anticipation of the Federal Reserve interest rate hike, which was realized last week.
Regional bank ETFs, including the SPDR S&P Regional Banking ETF (NYSEArca: KRE), have been leading that charge. Just this month, KRE, the largest regional bank ETF, is higher by 9.4%, a move that extends its year-to-date gain to over 36%.
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. Additionally, the Fed is hoping to raise interest rates as many as three times next year, an effort that could further support KRE and friends.
“Since the election, the rally in small bank shares has been fierce. The S&P Regional Bank Index has shot up 25%. The prospect of higher interest rates and a more lax regulatory environment under President-elect Trump has investors thinking that bank profits are poised to shoot higher,” reports David Englander for Barron’s.
There is another important catalyst to consider for financial services stocks and ETFs: The potential for bullish earnings trends to emerge.
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. Regional banks are among the stocks most positively correlated to rising interest rates because higher rates improve net interest margins.
“While a more favorable environment bodes well for bank profits, after the recent rally, many small bank stocks already appear to reflect better times ahead. Some profit-taking in the sector may be in order,” according to Barron’s.
Investors have added $280.3 million to KRE following Election Day.
Politics are also boosting bank stocks. President-elect Donald 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.
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