Trading revenues among Wall Street banks surged during the height of the trading spree amidst the heightened volatility during the pandemic recovery. However, financial sector-related exchange traded funds could begin to ease into a new normal as conditions settle down.
Wall Street banks project trading revenue to settle at a “new normal” somewhere between pre-pandemic levels and the highs of the past two years, Reuters reports.
After the Federal Reserve inundated the markets with liquidity during the recovery phase, most of the money found its way into the markets, fueling trading activity and bolstering trading revenue. However, trading revenue among leading Wall Street banks dipped in the fourth quarter as markets began to normalize and the Fed began tapering its accommodative programs.
Banks like Goldman Sachs, JPMorgan, and Morgan Stanley that have large trading desks were among the biggest beneficiaries of volatility over the past two years.
“None of us could have anticipated the environment that we’ve lived through over the last two years and particularly the environment this year, which was obviously a significant tailwind for our business,” Goldman Sachs’ chief executive, David Solomon, told analysts.
“We in no way see that as a permanent environment that’s going to continue at this pace,” Solomon added.
Solomon, though, pointed out that the bank was still experiencing “reasonable” activity in 2022 and that the business could still grow regardless of the shifting market conditions.
“We have seen differentiation in global central bank policies which should make for more active markets,” chief financial officer Sharon Yeshaya told Reuters. “We’ve been able to gain market share and that positions us particularly well as we go into 2022.”
Executives at rival JPMorgan Chase & Co also mirrored the sentiment after the country’s largest bank posted lackluster earnings.
“In our central case, markets and banking normalized somewhat in 2022 relative to their respective record years in 2020 and 2021 and resume modest growth thereafter,” chief financial officer Jeremy Barnum told analysts.
Looking ahead, the banks are eyeing rising rates and the potential for increased trading volumes on the fixed income side.
“The beginning of a rate-hiking cycle could be quite healthy for fixed income revenues in particular,” Barnum added.
As investors look back into bank stocks, some may turn to broad financial sector-related ETFs to capture the rebound, including the Financial Select Sector SPDR (NYSEArca: XLF), the Fidelity MSCI Financials Index ETF (NYSEArca: FNCL), the iShares U.S. Financials ETF (NYSEArca: IYF), and the Vanguard Financials ETF (NYSEArca: VFH). The broad financial sector ETFs include hefty tilts toward big banks, but these broad sector plays also include other non-pure bank plays in the financial sector covering capital markets, insurance companies, diversified financial services, and consumer finance, among others.
On the other hand, investors can also turn to more bank-focused ETFs like the iShares U.S. Regional Banks ETF (NYSEArca: IAT), the SPDR S&P Regional Banking ETF (NYSEArca: KRE), the Invesco KBW Regional Bank Portfolio (NYSEArca: KBWR), and the SPDR S&P Bank ETF (NYSEArca: KBE). Potential investors should also note that State Street Global Advisors’ bank-related ETFs follow a more equal-weighted indexing methodology, so their holdings lean toward mid- or smaller-sized companies.
For targeted exposure to the small-sized banking segment, investors can look to options like the First Trust NASDAQ ABA Community Bank Index Fund (NasdaqGM: QABA) and the Invesco S&P SmallCap Financials Portfolio (NYSEArca: PSCF).
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