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.
Related: Going to the Bank With Financial ETFs
Some strategists also argue that the financial sector may be a good area to look at this time around, given the potential for growth in a rising rate environment, along with potential tax and regulatory changes under the Donald Trump administration. After failing on the healthcare front, Congressional Republicans are likely to push forward with tax reform, looking to make that the centerpiece of their 2017 legislative accomplishments.
“Drilling down specifically into bank stocks, which make up a significant portion of the financial group, bullish sentiment also abounds. On Wednesday, the most heavily-traded contract of an ETF tracking banks was a call option betting on a 5.3% increase from the previous day’s close by December 15,” according to Business Insider. “That date is particularly significant because now, after Wednesday’s FOMC comments, economists think the central bank has a 63.8% chance of hiking rates, according to Bloomberg’s World Interest Rate Probability data. That’s a pretty hefty increase from the near 20% forecast from two weeks ago.”
For the week ended Sept. 20th, XLF added more than $750 million in new assets, bringing the ETF’s third-quarter inflows tally to over $1.3 billion.
For more information on the financial sector, visit our financial category.