After Three Fed Rate Hikes in 16 Months, Look to Bank ETFs

The Financial Select Sector SPDR (NYSEArca: XLF), the largest exchange traded fund dedicated to the financial services sector, is up just 2.2% year-to-date, a performance that trails the S&P 500 by a wide margin.

While financial services stocks and ETFs have been disappointments to this point in the year, that disappointment could be waning and now could be the time for investors to reconsider the sector.

There is some evidence to suggest the Federal Reserve’s three interest rate hikes over the past 16 months will benefit XLF and rival ETFs.

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. Although the Fed unveiled its first rate hike of 2017 last month, the central bank’s dovish tone punished regional bank stocks and ETFs.

Some of XLF’s biggest holdings “have some of the lowest valuations in the sector—and among large stocks in general—on earnings and price/book ratios. Big banks typically trade at lower valuations than regional and smaller ones because of greater complexity, tougher capital requirements, and more regulatory scrutiny,” reports Andrew Barry for Barron’s.