As has been widely reported in recent weeks, financial services ETFs, including the Financial Select Sector SPDR (NYSEArca: XLF), the largest financial sector ETF, have been gaining momentum.
For its part, XLF is now up more than 5% over the past month and more than 15% year-to-date. While those are short- and medium-term statistics, 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.
“So say technical analysts at Strategas Research Partners, who cite 75 years of history in arguing it’s way too early to abandon the group that only started outpacing the S&P 500 Index about 18 months ago,” reports Bloomberg. “Banks stocks could beat the benchmark for another three to five years regardless of where rates go or the shape of the yield curve, they wrote in a note Tuesday.”
The SPDR S&P Regional Banking ETF (NYSEArca: KRE), the largest regional bank ETF, is also up more than 5% over the past month.
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.