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.
Inflows to bank ETFs are impactful and a theme investors should monitor.
“We again found that ETF flows meaningfully impacted the dollar volume traded of underlying
component stocks,” according to a KBW note posted by Crystal Kim of Barron’s. “We reviewed our research coverage universe and found that on average, these 90 ETFs drove about 11% of total dollar volume traded since Election Day. At a maximum, we found these ETFs drove about 34% of a financial component’s dollar volume traded since Election Day.”
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.
Year-to-date, investors have added over $1.6 billion in new money to XLF while VFH has seen inflows of more than $632 billion.
For more information on the financial sector, visit our financial category.