The Financial Select Sector SPDR (NYSEArca: XLF), the largest exchange traded fund dedicated to the financial services sector, rose 1.3% last week. That is good for one of XLF’s best weekly performances in recent weeks and could be a sign the sagging sector is on its way to rebounding.
Weighing on bank stocks and ETFs is speculation that the Fed may not have the leeway with which to raise rates again this year.
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 in March, the central bank’s dovish tone punished regional bank stocks and ETFs.
“A pullback following such a quick rally should be expected, although the fact that tax reform legislation looked like it was going to get pushed further and further out into the future was a contributing factor. I was of the opinion that the relative value in the financial sector disappeared in the few months following the election. Given the catalysts coming down the pike in the near future coupled with the recent pullback, I think there’s value in the financials once again,” reports ETF Daily News.
The good news for financials is that the sector, the second-worst performer this year behind only energy, 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.
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.
“The proposed reform to Dodd-Frank would eliminate the fiduciary rule and rollback the Volcker rule. Also in the bill is the potential regulatory relief for institutions meeting certain leverage guidelines. Such changes would not only help lessen the cost of complying with these regulations but also potentially open up what financial institutions can do as far as lending and investing is concerned. Much of this was put in place following the financial crisis in order to help ensure another near meltdown doesn’t occur again,” according to ETF Daily News.
Some bond traders expect the Fed to raise rates again, perhaps as soon as this month, which could give XLF and rival ETFs a near-term boost.
For more information on the financial sector, visit our financial category.