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Bank ETFs Surge as Yield Curve Steepens

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The banking corner of the broader financial sector is back on track this month owing to the steepening of the yield curve. Bargain hunting also added to some gains.

The yield curve steepened with the spread between the 10-year and two-year widening to 63 basis points. The move came as President Donald Trump supported the $25 billion worth new payroll assistance for struggling U.S. passenger airlines and another $135 billion payroll protection program for small businesses. This piece of news was welcomed by investors after Trump put off the coronavirus stimulus package talks to post elections.

Additionally, the market continued to price in for the victory of Democratic candidate Joe Biden in next month's presidential elections, pushing the curve to steeper levels. This is because a Biden victory and a Democratic sweep in Congress will result in higher fiscal spending and more Treasury supply (read: Sector ETFs to Win/Lose If Biden Wins Elections).

As banks seek to borrow money at short-term rates and lend at long-term rates, a steepening yield curve will earn more on lending and pay less on deposits, thereby leading to a wider spread. This will expand net margins and increase banks profits.

Given this, bank ETFs have been on the rise this month. In fact, Invesco KBW Regional Banking ETF (KBWR - Free Report) , SPDR S&P Regional Banking ETF (KRE - Free Report) , First Trust NASDAQ ABA Community Bank Index Fund (QABA) and SPDR S&P Bank ETF (KBE - Free Report) gained in double-digits at the start of October and  carry a Zacks ETF Rank #3 (Hold).


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 $27 million and average daily volume of 5,000 shares. It charges 35 bps in fees per year from investors.


This fund, having AUM of $1.2 billion and average trading volume of 8.3 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 126 securities in its basket (read: 3 Reasons to Be Wary of Bank ETFs).


This ETF offers exposure to banks and thrifts, and tracks the NASDAQ OMX ABA Community Bank Index, holding 165 stocks in its basket. The fund has accumulated $56.9 million in its asset base and charges 60 bps in annual fees. It trades in a volume of 15,000 shares a day, on average.


This fund offers equal-weight exposure to 88 banking stocks by tracking the S&P Banks Select Industry Index. It amassed $1.2 billion in its asset base while trading in a heavy volume of 2.2 million shares a day, on average. The product charges 35 bps in annual fees.

Will the Solid Run Continue?

The banking sector has been struggling with COVID-19 adversities and Fed’s lower rate policy. With the latest rally, the S&P Banks Select Industry Index and Dow Jones U.S. Banks Index are still down 31.5% and 33.8%, respectively, from the year-to-date look.

Chairman Jerome Powell pledged to keep interest rates at lower levels until the end of 2023. Though Biden’s probable win is steepening the yield curve, its proposed tax hike plan from 21% to 28% is detrimental to the sector. Per a new S&P Global Market Intelligence analysis, a tax rate of 28% will drop net income by more than $7 billion per year for the nation's 10 largest banks while reducing the aggregate annual income by $9.36 billion for 209 publicly traded banks (read: Biden's Corporate Tax Plan Could Spell Trouble for Bank ETFs).

The banks, which will be most affected by Joe Biden’s corporate tax plan, are JPMorgan Chase (JPM - Free Report) , Bank of America (BAC - Free Report) , Citigroup (C - Free Report) , Wells Fargo (WFC - Free Report) and Truist Financial Corp (TFC - Free Report) . Per Bloomberg analysis, the nation's top six banks saved $32 billion on a combined basis since the Trump tax-cut law was enacted.

However, the round of upbeat data instilled confidence in the economy, thereby leading to a spike in the banking ETFs. This is because an improving economy will buoy demand for loans and all types of banking services. In particular, Americans grew optimistic about the economy with their confidence rising to the highest level in September since the coronavirus pandemic began. The housing market has also been booming with rock-bottom mortgage rates and higher demand for homes.

The U.S. auto industry also gathered momentum in the third quarter with sales rebounding from the coronavirus-related lows and buyers returning to showrooms after plunging the most in the second quarter since the Great Recession (read: Ride on a Recovering Auto Industry With These ETF & Stocks).

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