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Bank ETFs to Explode Higher on New Fed Policy

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At the virtual Jackson Hole central banking conference, the Federal Reserve unveiled an aggressive new policy that aims to tolerate the possibility of higher inflation while supporting the labor market as much as possible.

The Fed Chairman Jerome Powell would shift its inflation target to an “average” of 2%. This means it will allow inflation to run “moderately” above the Fed’s 2% goal “for some time” following periods when it ran below that objective. The Fed aims to ensure that employment doesn’t fall short of its maximum level, indicating that a robust job market can be sustained without causing an increase in inflation (read: ETF Laggards are Emerging Leaders: Here's Why).

The move could reduce the potential for interest rate hikes when the unemployment rate falls, so long as inflation does not creep up as well. As such, the new strategy, slated to be implemented as soon as next month, looks to keep short-term interest rates near zero for five years or possibly more.

A Boon for Banks

The Fed’s announcement has led to a steepening of the yield curve, which is the difference between yields on longer- and shorter-dated bonds. This condition is highly beneficial for the financial sector, especially banks. This is because banks seek to borrow money at short-term rates and lend at long-term rates. Now, if short-term rates remain low and long-term rates rise due to a recovering economy, the banks will earn more on lending and pay less on deposits, thereby leading to a wider spread. This would expand net margins and increase banks profits.

Given this, investors should tap the opportune moment by investing in this sector. While betting on an individual stock is certainly an option, investing in a basket of stocks via ETFs provides diversification benefits. Below we have highlighted the six bank ETFs:

SPDR S&P Regional Banking ETF (KRE - Free Report)

This fund, having AUM of $1.2 billion and average trading volume of around 9.3 million shares, offers exposure to regional banks. It follows the S&P Regional Banks Select Industry Index, charging investors 35 bps a year in fees. KRE holds 129 securities in its basket and has a Zacks ETF Rank #4 (Sell) with a High risk outlook (read: Key ETF Areas to Track as Biden Victory Looks Quite Likely).

iShares U.S. Regional Banks ETF (IAT - Free Report)

This ETF offers exposure to 54 small and mid-cap regional bank stocks by tracking the Dow Jones U.S. Select Regional Banks Index. The fund has amassed $229.3 million in its asset base and sees a good volume of 232,000 shares a day. It charges 42 bps in annual fees and has a Zacks ETF Rank #4 with a High risk outlook.

Invesco KBW Regional Banking ETF (KBWR - Free Report)

This fund follows the KBW Nasdaq Regional Banking Index, holding 51 stocks in its basket. It is a relatively less-popular and less-liquid option in the space, with AUM of $28.5 million and an average daily volume of 5,000 shares. It charges 35 bps in fees per year from investors.

SPDR S&P Bank ETF (KBE - Free Report)

This fund offers equal-weight exposure to 86 banking stocks by tracking the S&P Banks Select Industry Index. Regional banks dominate the portfolio with 76.8% share while thrifts & mortgage finance, diversified banks, other diversified financial services, and asset management & custody banks take the remainder. It has amassed $1.3 billion in its asset base while trading in heavy volume of 2.7 million shares a day, on average. The product charges 35 bps in annual fees and has a Zacks ETF Rank #2 with a High risk outlook.

Invesco KBW Bank ETF (KBWB - Free Report)

This fund provides exposure to companies primarily engaged in U.S. banking activities by tracking the KBW Nasdaq Bank Index. With AUM of $748.9 million, it holds 26 stocks in its basket and trades in solid volume of 761,000 shares per day, on average. It charges 35 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Banking Earnings Decent in Q2: ETFs in Focus).

First Trust Nasdaq Bank ETF (FTXO - Free Report)

This fund follows the Nasdaq US Smart Banks Index, which measures the performance of U.S. companies within the banking industry. It holds 30 securities in its basket and charges 60 bps in annual fees. The ETF has AUM of $66.3 million and trades in an average daily volume of 46,000 shares. It has a Zacks ETF Rank #4.

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