XLF is coming off one of its best annual performances since the global financial crisis. While the financial services sector, the second-largest sector allocation in the S&P 500, has some doubters after last year’s impressive rally, some market observers believe the sector can keep tracking higher this year.
In addition to XLF, the largest financial services ETF, the SPDR S&P Bank ETF (NYSEArca: KBE) and SPDR S&P Regional Banking ETF (NYSEArca: KRE), among other exchange traded funds dedicated to bank stocks, have been soaring since early November.
Bank ETFs are benefiting from speculation that the Federal Reserve will boost interest rates multiple times this year. 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.
“Increased trading activity following the U.S. election helped to drive capital markets growth for the five large global trading and universal banks, including Bank of America Corporation, Citi, Goldman Sachs, JP Morgan, and Morgan Stanley. Results increased 20% in aggregate from 4Q15, with most of the improvement in FICC, up 48% from the prior year. Debt underwriting was also a highlight due to more leveraged finance issuances,” said Fitch.
For more information on the banking sector, visit our financial category.