The Federal Reserve raised interest rates by 25 basis points on Wednesday, prompting some market observers to speculate that another six or seven rate hikes are on the way through the end of the year.
Conventional wisdom dictates that Fed tightening regimes should be constructive for bank stocks and the related exchange traded funds, such as the Invesco KBW Bank ETF (NASDAQ: KBWB). However, owing to varying business lines, some banks are more levered to rising rates than others.
That underscores the utility of a fund like KBWB in rising rate environments. Investors can tap KBWB, which tracks the KBW Nasdaq Bank Index, to access a basket of bank stocks rather than stock-picking in the group and risk choosing a name that might not benefit from higher rates.
“The ~120 [basis points] YTD increase in 2yr UST yields which should be quite impactful, as banks deploy excess cash and cash flows from bond books into higher yielding investment securities/loans,” said Ebrahim Poonawala, banking analyst at Bank of America.
Bank of America recently published a list of bank stocks that are poised to benefit from the Fed’s latest tightening cycle, and several of KBWB’s 25 components are in the group. Wells Fargo (NYSE:WFC), KBWB’s largest holding at a weight of 8.68%, tops the list.
M&T Bank (NYSE:MTB) and Citizens Financial Group (NYSE:CFG), which combine for over 7% of the KBWB portfolio, are also on the Bank of America list.
“M&T Bank has a $200 per share price target from Bank of America. That’s 10% above where the stock closed on Wednesday. The bank’s upside is due to potential cost and revenue synergies from its acquisition of People’s United Bank, according to Bank of America,” reports Maggie Fitzgerald for CNBC.
Signature Bank of New York (NASDAQ:SBNY), which accounts for 3% of KBWB’s weight, is also on the Bank of America list. The research firm has a $450 price target on Signature Bank, which is well above the stock’s March 16 closing price of around $320.
Bank of America has a $70 price target on Wells Fargo, which implies almost 40% upside from current levels.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.