Financial services exchange traded funds are continuing their bullish ways to start 2017. Some market observers believe the second-largest sector weight in the S&P 500 can continue its renaissance for several more years.
The Financial Select Sector SPDR (NYSEArca: XLF), the largest financial services ETF, is higher by more than 3% this year. XLF and rival financial services ETFs have been bolstered this year after President Donald Trump revealed plans to scale back 2010 Dodd-Frank legislation, which increased regulations on banks and financial services companies following the global financial crisis.
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.
“Trump has promised tax cuts and deregulation, including changes to the Dodd-Frank banking regulations, which should boost the financial sector. The president will also have the opportunity to reshape the Federal Reserve. Last week, Daniel Tarullo, the central bank’s top financial regulator, submitted his resignation effective April 5. He has been a member of the Fed’s board of governors since 2009,”reports CNBC.
White House National Economic Council Director Gary Cohn argued that existing regulations under Dodd-Frank are so sweeping that it is too hard for banks to lend and consumers’ choice of financial products is limited.
Cohn also said that the executive order could pave the way for additional orders that would affect the postcrisis Financial Stability Oversight Council, the committee overseeing the winding down of a giant faltering financial company and the way the government supervises large financial companies that aren’t traditional banks.
“Bank earnings improved in the quarter from higher trading activity, improved net interest margins, expense control and lower credit costs, however loan growth remains weak, which may impede material near-term earnings improvement,” said Julie Solar, Senior Director, Fitch Ratings, in a recent note.
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.
According to Thomson Reuters, the combined profit of S&P 500 companies is projected to have returned 6.2% in the fourth quarter, largely due to improving results out of the financial sector.
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