Last week, financial stocks and sector-related exchange traded funds slipped as second-quarter earnings season kicked off for the sector, but some analysts believe it could be time to consider financial services names and ETFs such as the Financial Select Sector SPDR (NYSEArca:XLF), the largest financial sector-related ETF.
Bankers are witnessing diminished demand for big loans out of businesses partly due to uncertainty over policy action on Capitol Hill. In addition, while the Federal Reserve’s rate hikes have helped banks earn more on loans, benefits were partially pared down by declines in long-term rates, with yields on Treasuries falling over the second quarter.
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.
“Despite the decline in share prices of JPMorgan and Citigroup on Friday after they reported earnings, bank stocks could see further upside if the yield curve steepens and inflation picks up, said Mark Tepper, president of Strategic Wealth Partners,” reports CNBC.
Weighing on bank stocks and ETFs is speculation that the Fed may not have the leeway with which to raise rates again this year.
Related: Financial ETFs Trip as Bank Earnings Fail to to Impress
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. The Fed has boosted borrowing costs twice this year with its most recent rate hike coming in June.
“A steeper yield curve, which describes a condition in which the longer-term Treasury yields rise in relation to shorter-term yields, is often considered bullish for the banks as they often lend in the longer term and borrow money in the short term,” according to CNBC. “Furthermore, Tepper pointed out that the banks look well-positioned here when it comes to their balance sheets, ‘given the fact that they all just crushed the stress tests.’”
To start the third quarter, investors have been enthusiastic about XLF, allocating over $1 billion in new money to the ETF. That more than makes up for the $317.1 million pulled from the fund in the second quarter.
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