It feels like rising Treasury yields are taking a bite out of plenty of sectors. Bank stock ETFs aren’t one of them, indicating investors may want to consider exchange traded funds like the Invesco KBW Bank ETF (NASDAQ: KBWB).
KBWB tracks the widely followed KBW Nasdaq Bank Index.
“The Index is a modified-market capitalization-weighted index of companies primarily engaged in US banking activities. The Index is compiled, maintained and calculated by Keefe, Bruyette & Woods, Inc. and Nasdaq, Inc. and is composed of large national US money centers, regional banks and thrift institutions that are publicly traded in the US,” according to Invesco.
With rates still low by historical standards, some market observers believe Treasury yields can continue climbing, potentially benefiting KBWB in the process.
“Bank stocks are on a tear this year, boosted by reopening optimism as the vaccine rolls out across the U.S.,” reports Felice Maranz for Bloomberg. “Investors are betting that more lending, more deals and more consumer spending are yet to come. The potential for fresh stimulus and infrastructure and other massive projects should lift their shares. Even so, while higher yields in a low-interest-rate environment are good for banks, sharp jumps have rattled global markets this week.”
KBWB in Rally Mode
For some time, financial services stocks have been viewed as a value destination, but low interest rates weighed on the thesis for the sector. With cyclical stocks rebounding and the economy showing some signs of life, KBWB is looks more attractive. Those alluring traits were in place before 10-year yields took off, meaning KBWB has multiple upside catalysts.
“Some research firms lifted earnings estimates and price targets. Morgan Stanley’s Ken Zerbe raised share price forecasts by 9% on average for midcap banks and expects to see a small impact on earnings per share to start and accelerate over time,” continues Bloomberg.
See also: Big Banks Sitting on an Enormous Pile of Cash. What Gives?
“The main bank index shifted from gains to losses and back again on Friday, after a better-than-expected jobs report bolstered confidence in the economy, closing up 1.7% as wrangling over stimulus continued, while yields on 10-year Treasuries touched 1.6%. Higher rates allow banks to charge more to borrowers, boosting lending margins on products from credit cards to mortgages,” concludes Bloomberg.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.