Ahead of the Federal Reserve meeting later this month, investors are seen upping their bets on a marquee regional bank exchange traded fund. That is the latest sign markets are expecting the Fed to raise interest rates for the third time this year.
Data suggest investors have been scurrying to the SPDR S&P Regional Banking ETF (NYSEArca: KRE), the largest regional bank ETF, in recent sessions.
KRE and rival regional bank ETFs were banking on higher interest rates to boost their fortunes. Higher interest rates would help widen the difference between what banks charge on loans and pay on deposits, which would boost earnings for the financial sector. Regional banks are among the stocks most positively correlated to rising interest rates because higher rates improve net interest margins.
KRE “took in $290 million on Nov. 29, its largest daily inflow since 2008. That added to the almost $270 million the fund received the day before, as investors line up bets that regional banks will benefit from tax reform and deregulation,” reports Bloomberg.
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.
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.
“With the Senate having sent the tax bill to the floor for debate, money managers are trying to position themselves should the legislation pass. Regional banks in particular will be winners, according to Walter Todd, chief investment officer at Greenwood Capital Associates,” according to Bloomberg.
Risk-tolerant traders who want capitalize on the short-term volatility have a number of leveraged and inverse ETF options to enhance potential returns. For instance, the Direxion Daily Regional Banks 3x Bull Shares (NYSEArca: DPST) can capitalize on short-term views on further strength in the financial sector, or the Direxion Daily Regional Banks 3x Bear Shares (NYSEArca: WDRW) can express short-term hedge of the opposite.
For more information on the financial sector, visit our financial category.