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Why Bank ETFs Are Surging

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U.S. banks have been on a tear in recent weeks given the rise in Treasury yields. The 10-year Treasury yields hit the highest level since early June, leading to a steepening of the yield curve. 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.

Yields Rising

As the markets are bracing for heightened volatility over the election results, investors’ turned skittish, putting money into the Treasury bonds. Notably, the Treasury bonds tracking the long end of the yield curve often provide a safe haven.

Bill Merz, head of fixed income research at U.S. Bank Wealth Management in Minneapolis, pointed to “the potential for a significant amount of volatility in the market as some traders have positioned for Democrats to win the White House and control of Congress in the election.” According to him, the scenario will result in higher fiscal spending and more Treasury supply that would boost economic growth and lift inflation (read: 5 ETFs Rising as 'Reflation Trade' Picks Up on Stimulus Hope).

Further, the Federal Reserve pledged to keep interest rates at lower levels until the end of 2023. The central bank will not increase rates until labor market conditions return to the “maximum employment,” and inflation has risen to 2% and “is on track to moderately exceed 2% for some time. This strategy is pushing the long-term yields higher than the short-term, sparking huge rally in longer-dated Treasuries.

Moreover, the rounds of upbeat data instilled confidence in the economy, thereby leading to a spike in the banking sector. 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 and are spending higher since the coronavirus pandemic began. The housing market is 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).

Against such a backdrop, bank ETFs have been surging over the past month, defying the broader market rout seen in October. Below, we have highlighted them. All these funds have a Zacks ETF Rank #3 (Hold):

SPDR S&P Regional Banking ETF (KRE - Free Report) – Up 13.2%

This fund, having AUM of $1.2 billion and average trading volume of around 9.1 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: 5 Sector ETFs That Showed Strength Despite the Worst October).

Invesco KBW Regional Banking ETF (KBWR - Free Report) – Up 11.7%

This fund follows the KBW Nasdaq Regional Banking Index, holding 52 stocks in its basket. It is a relatively less-popular and less-liquid option in the space, with AUM of $29.5 million and an average daily volume of 6,000 shares. It charges 35 bps in fees per year from investors.

First Trust NASDAQ ABA Community Bank Index Fund (QABA - Free Report) – Up 11.6%

This ETF offers exposure to banks and thrifts, and tracks the NASDAQ OMX ABA Community Bank Index, holding 163 stocks in its basket. It has accumulated $54.7 million in its asset base and charges 60 bps in annual fees. It trades in volume of 20,000 shares a day, on average.

iShares U.S. Regional Banks ETF (IAT - Free Report) – Up 10.9%

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 $246.7 million in its asset base and sees a good volume of 151,000 shares a day. It charges 42 bps in annual fees.

SPDR S&P Bank ETF (KBE - Free Report) – Up 10.6%

This fund offers equal-weight exposure to 88 banking stocks by tracking the S&P Banks Select Industry Index. Regional banks dominate the portfolio with 72.7% share while thrifts & mortgage finance, diversified banks, other diversified financial services and asset management & custody banks take the remainder. It has amassed $1.6 billion in its asset base while trading in heavy volume of 2.6 million shares a day, on average. The product charges 35 bps in annual fees (read: Bank ETFs Surge as Yield Curve Steepens).

First Trust Nasdaq Bank ETF (FTXO - Free Report) – Up 10.6%

This fund follows the Nasdaq US Smart Banks Index, which measures the performance of U.S. companies within the banking industry. It holds 29 securities in its basket and charges 60 bps in annual fees. The ETF has AUM of $67.7 million and trades in an average daily volume of 24,000 shares.

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