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The banking sector has seen a strong start to 2021. In fact, the S&P Banks Select Industry Index is up 31.4% so far in the year in comparison to the broader S&P 500 index’s rise of 12.7%. Notably, cyclical sectors like industrial, financial, energy and consumer discretionary have witnessed increased attention from investors this year. Markedly, stocks within the cyclical sectors mostly behave in tandem with the prevalent economic conditions and when growth returns to normal levels, these sectors will automatically perform well.
The year so far has seen investors optimistic about a variety of factors like the passage of the $1.9-trillion coronavirus relief package, Fed’s decision to maintain rates near zero until 2023, accelerated coronavirus vaccine distributions and reopening of global economies. Notably, the central bank raised its economic growth outlook considering the vaccine and stimulus optimism and it also expects higher inflation this year.
The central bank has lifted its forecast for GDP growth to 6.5% in 2021 from 4.2% stated in December 2020. It has also raised the economic growth forecast from 3.2% to 3.3% for 2022.
The financial sector has come up with impressive results so far this earnings season. Of the 83.7% S&P companies in the sector that have reported, 90.9% beat bottom-line estimates. For these companies, earnings rose 112% while revenues rose 8.2% year over year, per the Earnings Trends issued on May 4.
Notably, activity levels in the equity underwriting, M&A and trading also rose to around record levels for the seasonally weak first quarter, which more than offset continued softness in lending demand and margin pressure.
Going on, it is a known fact that an improving U.S. economy can result in continued rise in demand for loans. Also, steepening of the yield curve (the difference between short and long-term interest rates) is likely to have supported banks’ net interest margin in the last quarter. The yield on 10-year U.S. Treasury Bond was 1.74% at quarter-end, up 82 basis points from 0.92% at 2020-end.
Consequently, net interest income, which makes a major portion of banks’ revenues, is expected to have got support from steepening of the yield curve and a modest rise in loan demand.
Looking forward, the Fed will put an end to restrictions on bank dividends and buybacks for most institutions on Jun 30, given they clear the current round of stress tests, the central bank recently announced. Otherwise, restrictions will continue through Sep 30. The results of this year's test will be released on Jul 1. This factor has instilled investors’ confidence in the banking industry.
Markedly, the central bank imposed restrictions last year to boost banks’ capital and ensure that financial institutions remained ready to lend to those affected by the coronavirus pandemic. Notably, Fed’s decision came at an opportune moment as banks have been benefiting from higher interest rates.
Banking ETFs Up More Than 30% YTD
Against this backdrop, let’s take a look at some banking ETFs that have gained more than 30% so far in the year and have a Zacks ETF Rank #2 (Buy):
The fund seeks investment results that correspond generally to the price and yield, before fees and expenses, of the Nasdaq US Smart Banks Index. The index is a modified factor weighted index, designed to provide exposure to U.S. companies within the banking industry. It has AUM of $251.4 million and charges 0.60% in expense ratio (read: 5 Top-Ranked Market-Beating ETFs With Upside Potential).
iShares U.S. Regional Banks ETF (IAT - Free Report) — up 38.1%
The fund seeks to track the investment results of an index composed of U.S. equities in the regional banks sector. It has AUM of $792.3 million and charges 0.42% in expense ratio (read: Bank ETFs Tumble on Archegos Downfall: What's in Store?).
The fund is based on the KBW Nasdaq Bank Index. The index is a modified-market capitalization-weighted index of companies primarily engaged in U.S. banking activities. It has AUM of $2.86 billion and charges 0.35% in expense ratio (read: Winning Sector ETFs on Biden's First 100 Days of Ruling).
The fund seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&PRegional Banks Select Industry Index. It has AUM of $5.62 billion and charges 0.35% in expense ratio (read: ETF Strategies to Trade the "Sell in May and Go Away" Adage).
The fund seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&PBanks Select Industry Index. It has AUM of $4.18 billion and charges 0.35% in expense ratio (read: 5 ETF Strategies to Follow Warren Buffett's Vision).
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5 Banking ETFs That Have Gained More Than 30% YTD
The banking sector has seen a strong start to 2021. In fact, the S&P Banks Select Industry Index is up 31.4% so far in the year in comparison to the broader S&P 500 index’s rise of 12.7%. Notably, cyclical sectors like industrial, financial, energy and consumer discretionary have witnessed increased attention from investors this year. Markedly, stocks within the cyclical sectors mostly behave in tandem with the prevalent economic conditions and when growth returns to normal levels, these sectors will automatically perform well.
The year so far has seen investors optimistic about a variety of factors like the passage of the $1.9-trillion coronavirus relief package, Fed’s decision to maintain rates near zero until 2023, accelerated coronavirus vaccine distributions and reopening of global economies. Notably, the central bank raised its economic growth outlook considering the vaccine and stimulus optimism and it also expects higher inflation this year.
The central bank has lifted its forecast for GDP growth to 6.5% in 2021 from 4.2% stated in December 2020. It has also raised the economic growth forecast from 3.2% to 3.3% for 2022.
The financial sector has come up with impressive results so far this earnings season. Of the 83.7% S&P companies in the sector that have reported, 90.9% beat bottom-line estimates. For these companies, earnings rose 112% while revenues rose 8.2% year over year, per the Earnings Trends issued on May 4.
Notably, activity levels in the equity underwriting, M&A and trading also rose to around record levels for the seasonally weak first quarter, which more than offset continued softness in lending demand and margin pressure.
Going on, it is a known fact that an improving U.S. economy can result in continued rise in demand for loans. Also, steepening of the yield curve (the difference between short and long-term interest rates) is likely to have supported banks’ net interest margin in the last quarter. The yield on 10-year U.S. Treasury Bond was 1.74% at quarter-end, up 82 basis points from 0.92% at 2020-end.
Consequently, net interest income, which makes a major portion of banks’ revenues, is expected to have got support from steepening of the yield curve and a modest rise in loan demand.
Looking forward, the Fed will put an end to restrictions on bank dividends and buybacks for most institutions on Jun 30, given they clear the current round of stress tests, the central bank recently announced. Otherwise, restrictions will continue through Sep 30. The results of this year's test will be released on Jul 1. This factor has instilled investors’ confidence in the banking industry.
Markedly, the central bank imposed restrictions last year to boost banks’ capital and ensure that financial institutions remained ready to lend to those affected by the coronavirus pandemic. Notably, Fed’s decision came at an opportune moment as banks have been benefiting from higher interest rates.
Banking ETFs Up More Than 30% YTD
Against this backdrop, let’s take a look at some banking ETFs that have gained more than 30% so far in the year and have a Zacks ETF Rank #2 (Buy):
First Trust Nasdaq Bank ETF (FTXO - Free Report) — up 38.3%
The fund seeks investment results that correspond generally to the price and yield, before fees and expenses, of the Nasdaq US Smart Banks Index. The index is a modified factor weighted index, designed to provide exposure to U.S. companies within the banking industry. It has AUM of $251.4 million and charges 0.60% in expense ratio (read: 5 Top-Ranked Market-Beating ETFs With Upside Potential).
iShares U.S. Regional Banks ETF (IAT - Free Report) — up 38.1%
The fund seeks to track the investment results of an index composed of U.S. equities in the regional banks sector. It has AUM of $792.3 million and charges 0.42% in expense ratio (read: Bank ETFs Tumble on Archegos Downfall: What's in Store?).
Invesco KBW Bank ETF (KBWB - Free Report) — up 37.6%
The fund is based on the KBW Nasdaq Bank Index. The index is a modified-market capitalization-weighted index of companies primarily engaged in U.S. banking activities. It has AUM of $2.86 billion and charges 0.35% in expense ratio (read: Winning Sector ETFs on Biden's First 100 Days of Ruling).
SPDR S&P Regional Banking ETF (KRE - Free Report) — up 37.6%
The fund seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&PRegional Banks Select Industry Index. It has AUM of $5.62 billion and charges 0.35% in expense ratio (read: ETF Strategies to Trade the "Sell in May and Go Away" Adage).
SPDR S&P Bank ETF (KBE - Free Report) — up 33.4%
The fund seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&PBanks Select Industry Index. It has AUM of $4.18 billion and charges 0.35% in expense ratio (read: 5 ETF Strategies to Follow Warren Buffett's Vision).
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>