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Yields continued to surge at the start of 2022 on inflationary expectations and a hawkish Fed. The two-year yields were the highest since March 2020, while 10-year yields climbed to the strongest level since April 2021. The 30-year yields touched more than 2-month high.
A rising rate environment is highly beneficial for the financial sector, especially banks. Investors can tap this momentum with SPDR S&P Regional Banking ETF (KRE - Free Report) , SPDR S&P Bank ETF (KBE - Free Report) , iShares U.S. Regional Banks ETF (IAT - Free Report) , Invesco KBW Bank ETF (KBWB - Free Report) and First Trust Nasdaq Bank ETF (FTXO - Free Report) . All these funds have a Zacks ETF Rank #3 (Hold).
The latest Fed minutes revealed policymakers’ concern about worsening inflation and early interest rate hikes to combat rising inflation. The policymakers signaled three rate increases this year and three in the following year as inflation concerns deepened. The probabilities of a March interest rate hike of 0.25% surged to 72%, according to fed futures trading contracts high (read: Treasury Yields Jump to Start New Year: ETFs to Play).
The central bank plans to buy $60 billion per month of bonds in combined Treasuries and agency mortgage-backed securities starting in January, down from $90 billion in December and 120 billion from the start of the pandemic through November.
Banks to Win
As banks seek to borrow money at short-term rates and lend at long-term rates, the rise in interest rates will earn more on lending and pay less on deposits, leading to a wider spread. This will expand net margins and increase banks’ profits.
The current near-zero rates have dampened net interest margins (an important barometer to gauge banks’ financial performance), thereby hurting banks’ top-line growth. When the Fed starts increasing interest rates, pressure on margins will gradually alleviate and support banks’ net interest income. Notably, banks earn a major portion of their revenues from interest income.
Additionally, the improving economy backed by strong hiring, rising consumer confidence, and increasing wages will continue to support the banking industry.
SPDR S&P Regional Banking ETF provides exposure to the regional banks segment by tracking the S&P Regional Banks Select Industry Index. It holds 140 stocks in its basket with each accounting for no more than 2% of the assets (read: 5 ETFs Benefiting From High Inflation).
SPDR S&P Regional Banking ETF has AUM of $5 billion and charges 35 bps in annual fees. It trades in an average daily volume of 8.4 million shares.
SPDR S&P Bank ETF offers equal-weight exposure to 98 banking stocks by tracking the S&P Banks Select Industry Index. Regional banks dominate the portfolio with 74.6% share while thrifts & mortgage finance, diversified banks, other diversified financial services and asset management & custody banks take the remainder.
SPDR S&P Bank ETF has amassed $3.1 billion in its asset base while trading in a heavy volume of 2.4 million shares a day, on average. The product charges 35 bps in annual fees (read: Best ETF Strategies for 2022).
Invesco KBW Bank ETF provides exposure to the 25 leading national money centers and regional banks or thrifts. It follows the KBW Bank Index. Invesco KBW Bank ETF is concentrated on the top five firms that make up for more than 7% share each.
Invesco KBW Bank ETF has managed $2.8 billion in its asset base and trades in a solid volume of 1.2 million shares per day on average. The expense ratio comes in at 0.35%.
iShares U.S. Regional Banks ETF offers exposure to 39 small and mid-cap regional bank stocks by tracking the Dow Jones U.S. Select Regional Banks Index. It is largely concentrated on the top three firms with a double-digit allocation each.
iShares U.S. Regional Banks ETF has amassed $1.4 billion in its asset base while seeing a good volume of 154,000 shares a day. The product charges 41 bps in annual fees and has a Zacks ETF Rank #3.
First Trust Nasdaq Bank ETF follows the Nasdaq US Smart Banks Index, which measures the performance of U.S. companies within the banking industry. It holds 28 securities in its basket and charges 60 bps in annual fees (read: 5 ETFs Soaring to Start 2022).
First Trust Nasdaq Bank ETF has AUM of $286.5 million and trades in volume of 76,000 per share on average.
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Count on Bank ETFs as Rates Rise
Yields continued to surge at the start of 2022 on inflationary expectations and a hawkish Fed. The two-year yields were the highest since March 2020, while 10-year yields climbed to the strongest level since April 2021. The 30-year yields touched more than 2-month high.
A rising rate environment is highly beneficial for the financial sector, especially banks. Investors can tap this momentum with SPDR S&P Regional Banking ETF (KRE - Free Report) , SPDR S&P Bank ETF (KBE - Free Report) , iShares U.S. Regional Banks ETF (IAT - Free Report) , Invesco KBW Bank ETF (KBWB - Free Report) and First Trust Nasdaq Bank ETF (FTXO - Free Report) . All these funds have a Zacks ETF Rank #3 (Hold).
The latest Fed minutes revealed policymakers’ concern about worsening inflation and early interest rate hikes to combat rising inflation. The policymakers signaled three rate increases this year and three in the following year as inflation concerns deepened. The probabilities of a March interest rate hike of 0.25% surged to 72%, according to fed futures trading contracts high (read: Treasury Yields Jump to Start New Year: ETFs to Play).
The central bank plans to buy $60 billion per month of bonds in combined Treasuries and agency mortgage-backed securities starting in January, down from $90 billion in December and 120 billion from the start of the pandemic through November.
Banks to Win
As banks seek to borrow money at short-term rates and lend at long-term rates, the rise in interest rates will earn more on lending and pay less on deposits, leading to a wider spread. This will expand net margins and increase banks’ profits.
The current near-zero rates have dampened net interest margins (an important barometer to gauge banks’ financial performance), thereby hurting banks’ top-line growth. When the Fed starts increasing interest rates, pressure on margins will gradually alleviate and support banks’ net interest income. Notably, banks earn a major portion of their revenues from interest income.
Additionally, the improving economy backed by strong hiring, rising consumer confidence, and increasing wages will continue to support the banking industry.
We have profiled the above-mentioned ETFs below:
SPDR S&P Regional Banking ETF (KRE - Free Report)
SPDR S&P Regional Banking ETF provides exposure to the regional banks segment by tracking the S&P Regional Banks Select Industry Index. It holds 140 stocks in its basket with each accounting for no more than 2% of the assets (read: 5 ETFs Benefiting From High Inflation).
SPDR S&P Regional Banking ETF has AUM of $5 billion and charges 35 bps in annual fees. It trades in an average daily volume of 8.4 million shares.
SPDR S&P Bank ETF (KBE - Free Report)
SPDR S&P Bank ETF offers equal-weight exposure to 98 banking stocks by tracking the S&P Banks Select Industry Index. Regional banks dominate the portfolio with 74.6% share while thrifts & mortgage finance, diversified banks, other diversified financial services and asset management & custody banks take the remainder.
SPDR S&P Bank ETF has amassed $3.1 billion in its asset base while trading in a heavy volume of 2.4 million shares a day, on average. The product charges 35 bps in annual fees (read: Best ETF Strategies for 2022).
Invesco KBW Bank ETF (KBWB - Free Report)
Invesco KBW Bank ETF provides exposure to the 25 leading national money centers and regional banks or thrifts. It follows the KBW Bank Index. Invesco KBW Bank ETF is concentrated on the top five firms that make up for more than 7% share each.
Invesco KBW Bank ETF has managed $2.8 billion in its asset base and trades in a solid volume of 1.2 million shares per day on average. The expense ratio comes in at 0.35%.
iShares U.S. Regional Banks ETF (IAT - Free Report)
iShares U.S. Regional Banks ETF offers exposure to 39 small and mid-cap regional bank stocks by tracking the Dow Jones U.S. Select Regional Banks Index. It is largely concentrated on the top three firms with a double-digit allocation each.
iShares U.S. Regional Banks ETF has amassed $1.4 billion in its asset base while seeing a good volume of 154,000 shares a day. The product charges 41 bps in annual fees and has a Zacks ETF Rank #3.
First Trust Nasdaq Bank ETF (FTXO - Free Report)
First Trust Nasdaq Bank ETF follows the Nasdaq US Smart Banks Index, which measures the performance of U.S. companies within the banking industry. It holds 28 securities in its basket and charges 60 bps in annual fees (read: 5 ETFs Soaring to Start 2022).
First Trust Nasdaq Bank ETF has AUM of $286.5 million and trades in volume of 76,000 per share on average.