The banking sector is increasingly gaining investor attention as the prospects for the space look bright amid the rebounding U.S. economy. The S&P Banks Select Industry Index has surged 31.9% so far in the year compared with the broader S&P 500 Index’s rise of 12.5%.

In fact, shares of major banks like Goldman Sachs (GS Quick QuoteGS - Free Report) have climbed 47.2% so far this year while Bank of America Corporation (BAC Quick QuoteBAC - Free Report) and JPMorgan (JPM Quick QuoteJPM - Free Report) have risen 41.5% and 30.4% year to date, respectively.

Notably, the Institute of International Finance (IIF) expects U.S. banks to report “record level” earnings in 2021, according to a CNBC article. In this regard, IIF chief executive Tim Adams said that “I think we’re going to see record-level earnings this year so it’s a good year for banks. We see it in the bank stocks, and I think it’ll continue to reflect those underlying, really strong fundamentals for at least the rest of this year,” per a CNBC article.

Factors Buoying Optimism

The world’s largest economy is strongly controlling the pandemic with accelerated coronavirus vaccine distribution. Per the Centers for Disease Control and Prevention (CDC) data, more than half of the U.S. population is already administered at least a single dose of COVID-19 vaccination, according to a CNBC article.

Further, a CNN report stated that 12 states met President Joe Biden’s target to vaccinate 70% adults with at least one dose of coronavirus vaccine by Jul 4 as confirmed by the CDC.

Moreover, there are certain new economic data releases, which are pointing toward economic recovery. Notably, the recently-released robust job and manufacturing data majorly boosted market participants' confidence. The Department of Labor reported that the U.S. economy added 559,000 jobs in May compared with the upwardly revised 278,000 payrolls included in April as mentioned in a CNBC article.

Also, the latest ISM Manufacturing PMI data for the United States is painting a rosy picture for the sector. The ISM Manufacturing PMI read 61.2 in May against 60.7 in April. May’s growth was higher than analysts’ expectations of 60.7. Moreover, manufacturing activity rose for the 12th straight month.

It is a well-known fact that an improving U.S. economy can continue to perk up demand for loans. Also, steepening of the yield curve (the difference between short and long-term interest rates) is likely to support banks’ net interest margin. As a result, net interest income, which constitutes a chunk of banks’ revenues, is expected to have got support from the steepening of the yield curve and a modest rise in loan demand.

Looking forward, the Fed will remove restrictions from bank dividends and buybacks for most institutions on Jun 30, given that they clear the current round of stress tests recently announced by the central bank. Otherwise, constraints will continue through Sep 30. Results of this year's test will be released on Jul 1. This factor actually instilled investor confidence in the banking industry.

Markedly, the central bank had 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, the Fed’s decision came at an opportune moment as banks have been benefiting from higher interest rates.

Banking ETFs to Gain

Against this backdrop, let’s take a look at some banking ETFs that can gain from the current environment and have a Zacks ETF Rank #2 (Buy) at present:

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

The fund seeks to provide investment results that before fees and expenses correspond generally to the total return performance of the S&P Regional Banks Select Industry Index. It has AUM of $5.69 billion and charges 0.35% in expense ratio (read: Inflation Is Picking Up: 5 ETFs to Make the Most of It).

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

The fund seeks to provide investment results that before fees and expenses correspond generally to the total return performance of the S&P Banks Select Industry Index. It has AUM of $3.74 billion and charges 0.35% in expense ratio (read: Sector ETFs to Win/Lose as WTI Hovers Around 2018-Level).

Invesco KBW Bank ETF (KBWB Quick QuoteKBWB - Free Report)

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 $2.76 billion and charges 0.35% in expense ratio (read: Q1 Earnings Effect: 5 Must-Watch ETF Charts).

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

The fund intends to track the investment results of an index composed of U.S. equities in the regional banks sector. It has AUM of $803 million and charges 0.42% in expense ratio (read: Taper Talks to Start Soon? ETFs to Win).

First Trust Nasdaq Bank ETF  (FTXO Quick QuoteFTXO - Free Report)

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 $268.2 million and charges 0.60% in expense ratio (read:  5 Top-Ranked ETFs to Bet on After an Encouraging May).

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