Exchange traded funds tracking the financial services sector, the second-largest sector allocation in the S&P 500, continue to climb higher and the Federal Reserve continues to be a big reason why.
On Wednesday, the Financial Select Sector SPDR (NYSEArca: XLF), the largest financial services exchange traded fund, rose to its highest levels in nearly a decade as traders speculated the Fed will raise interest rates at its meeting later this month. Previously, some bond traders reduced wagers the Fed was heading toward a March rate hike, instead eyeing May and June as the times for the Fed’s first rate increases of 2017.
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.