With 10-year Treasury yields soaring, financial services stocks and funds like the Financial Select Sector SPDR (XLF) are back in style in a big way.
This ETF, one of the powerhouse SPDR products, provides exposure to an index that includes companies from the following industries: diversified financial services; insurance; commercial banks; capital markets; real estate investment trusts; thrift & mortgage finance; consumer finance; and real estate management & development. XLF contains the who’s-who of the domestic economy’s financial players, including JP Morgan, Wells Fargo, and more. This makes it an ideal play on the U.S. financials world.
XLF tracks the performance of the Financial Select Sector Index. As alluded to above, the fund seeks to provide precise exposure to companies in the diversified financial services; insurance; banks; capital markets; mortgage real estate investment trusts (‘REITs’); consumer finance; and thrifts and mortgage finance industries.
“The 10-year Treasury yield soared to a 14-month high of 1.74% on Thursday, a continuation of the benchmarks sharp move higher since the start January. The 30-year rate also climbed 6 basis points and breached the 2.5% level for the first time since August 2019,” reports Maggie Fitzgerald for CNBC. “During the climb in bond yields this year, bank stocks — which benefit from higher interest rates — have also outperformed. The KBW banking index is up 28% in 2021 on on increased optimism about the economic recovery as well as an improving rate outlook.”
XLF Is Excellent Again
Some analysts believe bank stock performance is about to take a turn for the better after falling behind on low interest rates and weak loan growth, along with credit concerns. Plus, there are some near-term catalysts for XLF and friends, including solid credit quality.
“Banks benefit from higher interest rates as their net interest margin, the difference between what banks pay on deposits and earn on loans, increases. Banks profits rise as the spread widens on the rate they borrow at in the short term and the rate they lend out at in the long term,” according to CNBC. “Higher rates also allow them to charge more services and make more on their various holdings. Not to mention, increased bond market activity helps the trading side for those with that business.”
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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.