Interest rates have been at basement-level lows with the Federal Reserve keeping a cautious eye on the economy. However, rates are starting to tick higher and this could feed into strength for financial ETFs like the Invesco S&P SmallCap Financials ETF (PSCF).
The fund is based on the S&P SmallCap 600® Capped Financials & Real Estate Index (Index). The Fund will normally invest at least 90% of its total assets in the securities, which may include real estate investment trusts (“REITs”), of small-capitalization US financial service companies that comprise the Index.
The Index is designed to measure the overall performance of common stocks of US financial services companies. These companies are principally engaged in the business of providing services and products, including banking, investment services, insurance and real estate finance services.
Furthermore, the Index is a subset of the S&P SmallCap 600® Index, which is a float-adjusted, market-capitalization-weighted index reflecting the US small-cap market. The Fund and the Index are rebalanced and reconstituted quarterly.
Looking at the YTD chart, PSCF is starting to move towards the upside in a strong November push for equities. As small-caps naturally can be subjected to wild swings in the market, investors will need a strong stomach during any downside.
Rates Inching Higher
The potential roller coaster ride could see more climbs than dips, especially if interest rates keep on inching higher. With financial ETFs like PSCF, higher rates on products like high yield accounts or mortgages mean more profits.
“I’m also watching interest rates,” said Craig Johnson, senior technical research analyst at Piper Sandler, in a CNBC interview. “Ten-year bond yields moving above 95 basis points is only going to put further power behind this move. And for me at this point in time, I’m going to watch it, and I’m waiting for that 95-basis-point move. Then I would be more bullish and look to perhaps have a much stronger opinion on the financials sector.”
The move for financials could hearken back to the financial crisis over a decade ago.
“If you look at what happened to financials after 2008, it took them about 24 months to get back into really great profitability. So, we can see a path out of here,” said Gina Sanchez, the founder and CEO of Chantico Global and chief market strategist at Lido Advisors, in the same interview. “Although the lower-for-longer [policy] is not necessarily helpful to financials, it has mitigated the credit risk that they would have otherwise taken during the pandemic. And so, it actually makes it more likely that they’ll become even more profitable afterwards.”
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