Big financial services exchange traded funds are getting bigger as investors flock to these ETFs as the sector continues soaring.
The Financial Select Sector SPDR (NYSEArca: XLF), the largest financial services exchange traded fund, iShares U.S. Financials ETF (NYSEArca: IYF) and Vanguard Financials ETF (NYSEArca: VFH) are gathering assets at a rapid pace as the second-largest sector weight in the S&P 500 ascends to its highest levels in about a decade.
“This year, investors have poured a combined $2.4 billion into three exchange-traded funds focused on banks — State Street Corp.’s Financial Select Sector SPDR fund, ticker XLF, BlackRock Inc.’s iShares U.S. Financials ETF, ticker IYF, and the Vanguard Financials ETF, ticker VFH — as a bet that the firms will benefit from Trump’s deregulation policies. The funds’ top holdings are global lenders like JPMorgan Chase & Co. and Wells Fargo & Co.,” reports Carolina Wilson for Bloomberg.
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.
For target exposure to banks, the First Trust NASDAQ ABA Community Bank Index Fund (NasdaqGM: QABA), PowerShares S&P SmallCap Financials Portfolio (NYSEArca: PSCF) and PowerShares KBW Regional Bank Portfolio (NYSEArca: KBWR) include large tilts toward small- and micro-cap bank stocks.
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.
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.
“Strong fundamentals are also helping to drive finance firms higher. Banks posted a 5 percent increase in profits in 2016, according to a recent report by the Federal Deposit Insurance Corp. Financials have been the best performing industry in the S&P 500 over the past 12 months, rising more than 42 percent, and were leading the market higher on Wednesday following Trump’s speech before Congress,” according to Bloomberg.
For more information on the financial sector, visit our financial category.