The Financial Select Sector SPDR (NYSEArca: XLF), the largest financial sector ETF, is up 4.7% over the past month, bringing its year-to-date gain to 14.6% and there are some factors that can contribute to more upside for the once lagging financial services sector.
Looking ahead, a number of factors could continue to support the financial sector. For instance, the Federal Reserve has expressed intention to raise rates, tighten monetary policy. Banks’ most basic profit-making business model is to take on deposits and issue loans, so higher interest rates means higher rates on loans, which translates to improved profit margins.
“Financials is the best performing sector since the election, surging more than 30 percent and hovering near a 10-year high. Kathy Lien of BK Asset Management says a combination of rising interest rates, tax reform and deregulation could continue to push the space to new highs,” reports CNBC.
As conditions improve, the Federal Reserve will tighten its monetary policy to obviate an overheating economy. The central bank has already outlined plans to start winding down its trillion dollar balance sheet in October and left a December rate hike open.
Investors should anticipate a tighter policy as a key inflation gauge this week could confirm U.S. inflation is moving toward the Fed’s 2% target.