Yes, Inflows to Bank ETFs Matter Thanks to Trump Policies

Investors have been hearing plenty about the recent success of the financial services sector and its corresponding exchange traded funds. Recent bullishness for ETFs tracking the S&P 500’s second-largest sector allocation has, not surprisingly, been accompanied by a massive influx of assets.

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 sector continues soaring to its highest levels since the financial crisis.

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.