The financial services sector, the second-largest sector allocation in the S&P 500, has been one of the most obvious beneficiaries of Donald Trump’s stunning ascent to the White House. That trend is benefiting exchange traded funds beyond the traditional, diversified ETFs providing broad-based financial services exposure.
That includes the First Trust NASDAQ ABA Community Bank Index Fund (NasdaqGM: QABA), which is up 57.5% over the past year.
The Trump administration’s expansionary policies would be especially beneficial for banks since the segment is sensitive to the overall economy. Moreover, the expansionary policies have fueled bets of increased Federal Reserve interest rate hikes to rein in a potentially overheating economy and rising inflation, which further supports lending revenue and their bottom line among bankers and insurers.
Smaller banks could find relief as the Trump administration rolls back strict regulatory reforms imposed on the financial sector, including the infamous Dodd-Frank Act.
Dodd-Frank imposed a number of restrictions on the financial sector, and industry observers contended that the new regulations forced on an unequally high burden on smaller banks, which has contributed to slow returns among mid- to small-sized banks.
“The financial sector is widely considered one likely to benefit from the new political order. One of the more intriguing subsets of the sector is regional and community banks,” according to a Seeking Alpha analysis of bank ETFs holding smaller and mid-cap names.
QABA’s three-year standard deviation and beta are slightly below that of the S&P Composite 1500 Financials Index and banks “must meet certain operating history, solvency, and financial statement requirements to remain eligible for inclusion in the index,” according to First Trust. Constituent companies must have market values of at least $200 million and average daily volume of at least $500,000.
An improving U.S. economy could foster increased borrowing and financing by businesses, large and small, across the U.S. while benign mortgage rates could also provide a lift to the mortgage lending operations of community and regional banks.
Predictably, much of the bull case for regional and community banks, such as those found in QABA, depends on the Federal Reserve and interest rates. 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.
For more information on bank stocks, visit our financial category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.