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Financial ETFs Scaling New Highs: Here's Why

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The financial sector has been soaring lately on rising yields with many stocks and ETFs hitting new highs. This is especially true as 10-year Treasury yield rose back to above 1.5% amid the prospect of the Fed’s policy tightening and persistent high inflation.
 
Fed Chair Jerome Powell in its last meeting signaled the tapering of bond buying followed by interest rate hikes as early as next year. The central bank is expected to begin scaling back the monthly bond purchases as soon as next month and complete the process by mid-2022. The policy statement also revealed that nine of 18 Fed policymakers foresee a liftoff in interest rates next year compared to seven policymakers in June. The median dot also projects three to four total rate hikes by the end of 2023. Through the end of 2024, the median FOMC member sees six to seven total rate hikes (read: ETFs to Bet On as Fed Turns Hawkish, Signals Tapering).

Meanwhile, inflation, which measures the increase in the cost of living over time, is running at 5.3% — the highest in nearly 13 years — driven by surging consumer demand, rising energy prices, and supply chain-related shortages. Additionally, the latest U.S. Fed’s preferred inflation gauge rose 3.6% in August from the year-ago month, representing the biggest jump since 1991.

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. Rapid vaccination, and economic and business reopening are powering consumer spending and resulting in robust growth. These will lead to higher demand for loans and all types of financial services. A better-than-expected manufacturing activity in September aided optimism about the economic recovery. 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 19%, which suggests outperformance in the coming months (see: all the Financial ETFs here).

In lieu of the above discussion, we have highlighted some financial ETFs that hit new peak in the latest trading session and will continue to perform well given that these products have a Zacks ETF Rank #1 (Strong Buy) or 3 (Hold):

Financial Select Sector SPDR Fund (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 billion and charges 12 bps in annual fees. It trades in an average daily volume of 47.2 million shares and has a Zacks ETF Rank #1.

Vanguard Financials ETF (VFH)

With AUM of $11.2 billion, this fund provides exposure to a basket of 396 stocks by tracking the MSCI US Investable Market Financials 25/50 Index. Diversified banks account for 23.6% of the portfolio, followed by regional banks (14%), asset management & custody banks (10.2%) and investment banking & brokerage (9%). The product charges 10 bps in annual fees and trades in average daily volume of 445,000 shares. It has a Zacks ETF Rank #1 (read: Top-Ranked ETFs That Are Up At Least 25% So Far This Year).

iShares U.S. Financials ETF (IYF - Free Report)

This ETF offers exposure to U.S. banks, insurers, and credit card companies by tracking the Russell 1000 Financials 40 Act 15/22.5 Daily Capped Index. It holds 142 stocks in its basket with key holdings in diversified financials, banks and insurance. The fund has amassed $2.3 billion in its asset base and charges 41 bps in annual fees. It trades in an average daily volume of 404,000 shares and has a Zacks ETF Rank #2.

First Trust Financials AlphaDEX Fund (FXO - Free Report)

This fund follows the StrataQuant Financials Index, which employs the AlphaDEX stock selection methodology to select stocks from the Russell 1000 Index. Holding 105 stocks in its basket, the ETF has amassed $1.4 billion and charges 62 bps in annual fees. It trades in an average daily volume of 227,000 shares and has a Zacks ETF Rank #3.

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 $3.3 billion, it holds 26 stocks in its basket and trades in a solid volume of 1.5 million shares per day on average. It charges 35 bps in annual fees and has a Zacks Rank #3.

iShares U.S. Financial Services ETF (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 $2.6 billion in its asset base and trades in a good average daily volume of about 69,000 shares. The fund charges an annual fee of 41 bps from investors and has a Zacks ETF Rank #3.

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

This ETF offers exposure to 39 small and mid-cap regional bank stocks by tracking the Dow Jones U.S. Select Regional Banks Index. The fund has amassed $1.3 billion in its asset base and sees a good volume of 98,000 shares a day. It charges 41 bps in annual fees and has a Zacks ETF Rank #3 (read: Fed Taper to Start in November? 7 ETFs to Buy).

Invesco DWA Financial Momentum ETF (PFI - Free Report)

This fund tracks the Dorsey Wright Financials Technical Leaders Index, which is designed to identify companies that are showing relative strength (momentum). It charges 60 bps in annual fees and trades in a good volume of 19,000 shares a day on average. The fund has 46 stocks in its basket and AUM of $95.6 million. It has a Zacks ETF Rank #3.