Minutes from the July Federal Reserve meeting indicates the tapering is in the cards. This is especially true as the central bank is planning to scale back its massive monthly bond purchases before the end of the year. Inflation remains high over the past several months, bolstering the support for the earlier-than-expected tapering (read:
5 ETFs to Bet on Fed's Stimulus Tapering Concerns, Weak Data). The central bank is currently buying $80 billion worth of Treasury securities and $40 billion worth of mortgage-backed securities per month to drive down longer-term interest rates and spur economic growth. The shift toward a tighter monetary policy will push the yields higher, thereby benefiting the financial sector. This is because rising rates will expand profits for banks, insurance companies, discount brokerage firms and asset managers. As the financial institutions seek to borrow money at short-term rates and lend at long-term rates, a steepening yield curve will lead to earning more on lending and paying less on deposits, thereby creating a wider spread. Additionally, the combination of some other factors bodes well for the financial sector. The U.S. economy returned to the pre-pandemic level with GDP rising 6.5% annually in the second quarter, indicating the sustained recovery from the pandemic recession. Rapid vaccinations, business reopenings and trillions of dollars of government stimulus spending powered consumer spending and resulted in robust growth. These will lead to higher demand for loans and all types of financial services. If the economy continues to recover, the loan growth is expected to bounce back strongly in the coming quarters. Further, higher oil prices are acting as catalysts given that most banks are highly exposed to the energy sector. Moreover, the upside to the finance sector is confirmed by the Zacks Sector Rank in the top 32%, which suggests outperformance in the coming months (see: all the Financial ETFs here). Given this, investors should tap the bullishness in the sector via ETFs. While there are a number of ETFs in this corner of the market, we have highlighted five funds from different industries that have a solid Zacks ETF Rank #1 (Strong Buy) or 2 (Buy). Financial Select Sector SPDR Fund ( XLF Quick Quote XLF - Free Report) This ultra-popular financial ETF seeks to provide exposure to 65 companies in the diversified financial services, insurance, banks, capital markets, mortgage real estate investment trusts (REITs), consumer finance, and thrifts and mortgage finance industries. The product has AUM of $42.2 billion and charges 12 bps in annual fees. It trades in an average daily volume of 53 million shares and has a Zacks ETF Rank #1. SPDR S&P Regional Banking ETF ( KRE Quick Quote KRE - Free Report) This fund targets the banking corner of the financial sector and follows the S&P Regional Banks Select Industry Index. It holds 132 stocks in its basket and charges 35 bps a year in fees. KRE is one of the largest and the most popular ETFs in the banking space with AUM of $4.5 billion and an average daily volume of more than 10 million shares. It has a Zacks ETF Rank #2 (read: 5 Top-Ranked ETFs Looking Good After a Decent July). iShares U.S. Financial Services ETF ( IYG Quick Quote IYG - Free Report) This product follows the Dow Jones U.S. Financial Services Index and offers exposure to U.S. investment banks, commercial banks, asset managers, credit card companies, and securities exchanges. Holding 105 stocks in its basket, it has amassed $2.5 billion in its asset base and trades in a good average daily volume of about 85,000 shares. The fund charges an annual fee of 42 bps from investors and has a Zacks ETF Rank #2. iShares U.S. Broker-Dealers & Securities Exchanges ETF ( IAI Quick Quote IAI - Free Report) This fund offers exposure to the 25 U.S. investment banks, discount brokerages, and stock exchange firms by tracking the Dow Jones U.S. Select Investment Services Index. It has accumulated $849.3 million in AUM and trades in moderate volume of nearly 152,000 shares a day. The product charges 41 bps in fees per year from investors and has a Zacks ETF Rank #2. (read: Finance ETF Hits New 52-Week High). First Trust NASDAQ ABA Community Bank Index Fund ( QABA Quick Quote QABA - Free Report) This ETF offers exposure to the largest banks and thrifts or their holding companies that are designated as banks by the Industry Classification Benchmark. It tracks the NASDAQ OMX ABA Community Bank Index, holding 194 stocks in its basket. The fund has accumulated $126 million in its asset base and trades in a volume of around 22,000 shares a day on average. It charges 60 bps in annual fees and has a Zacks ETF Rank #2.