The Financial Select Sector SPDR (NYSEArca: XLF), the largest financial sector ETF, is up 2.5% over the past week and some of the renewed bullishness on bank stocks and bank ETFs is attributable to a familiar catalyst: The Federal Reserve.
This week, the Fed confirmed it will begin unwinding its balance sheet and bond market participants continue expecting another interest rate hike in December, which could also benefit the financial services sector.
“Looking ahead, bullish sentiment is continuing to swell in financials. Following the Fed statement, an exchange-traded fund tracking the sector saw outstanding call contracts — or wagers that an asset’s price will rise — climb to the highest since December, relative to bearish puts, according to data compiled by Bloomberg,” reports Business Insider.
Some good news for XLF and friends is that the financial services sector is widely regarded as perhaps the only sector in the U.S. that is attractively valued relative to the broader market and its own long-term averages. The financial sector valuations still look relatively cheap, compared to the broader market. The sector’s valuations are still about 25% below the average since the early 1990s.