Catalysts Abound For Financial Services ETFs

Along with other sector exchange traded funds, the Financial Select Sector SPDR (NYSEArca: XLF), the largest financial services ETF, has pulled back in recent days, but many market observers maintain the view that 2018 could be another strong year for the S&P 500’s second-largest sector weight.

Capital levels at major U.S. banks are viewed as solid. Additionally, the Trump Administration’s tax reform effort is seen as a potential catalyst for the financial services sector, but it remains to be seen if that effort will come to life. Some industry observers expect the tax reform would help banks boost earnings in significant fashion.

“In addition, the corporate tax rate deduction included in the ‘Tax Cuts and Jobs Act’ provides a tailwind for bank earnings,” said State Street in a recent note. “Banks, on average, currently pay a 30% tax rate; the new tax bill will lower the corporate tax rate to 21%. A simple calculation indicates this could potentially save US banks 30% on taxes and boost earnings by 13%.”

Deregulation could also help the financial sector improve their margins. President Donald Trump has shown its eagerness in cutting back the red tape and remove some of the post-financial crisis regulations that has stifled the industry.

“As a result of stricter capital requirements placed on banks in the wake of the financial crisis, Morgan Stanley estimates that US banks are sitting on about $130 billion of excess capital, representing around 8% of the total market capitalization of the bank segment of the S&P 500,” according to State Street.