The Financial Select Sector SPDR (NYSEArca: XLF), the largest financial sector exchange traded fund, is up nearly 5% over just the past week, supporting the notion that bank stocks are one of Wall Street’s favored trades heading into the end of 2017.
Rising interest rates are seen helping U.S. banks and the related ETFs. The Federal Reserve has boosted borrowing costs twice this year and bond market observers widely expect a third rate hike when the Fed meets in December. The financial services sector could be working its way into a period of long-term out-performance. The recent rally in the sector could still be in the early innings, according to some market observers.
“Financial stocks were supposed to be one of the big winners in 2017, but instead ended up badly lagging the market for most of the year. Analysts, though, are willing to give the sector another shot heading into 2018,” reports CNBC. “With stronger economic prospects, higher interest rates and lowered regulatory barriers on the horizon, at least two analysts are telling clients to up their allocations to banks and other parts of the group. They also cite tax reform and additional consumer strength as reasons to be bullish.”
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.
“Tax reform, assuming Congress passes a measure similar to the proposals being bandied about, also is expected to boost the sector,” according to CNBC. “Bernstein analyst Kevin St. Pierre said a reduction in the corporate income tax rate from the current 35 percent to the 20 percent outlined in the Republican-sponsored plan would boost bank earnings by about 15 percent in 2019 — 21 percent for consumer finance.”
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.
XLF has seen fourth-quarter inflows of $2.1 billion, a sum topped by just five other ETFs.
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