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Should You Bank on Financial ETFs Now?

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Financial stocks are among the best performing areas of the market this year. The sector is up about 38% year-to-date, behind only energy sector.

Third quarter earnings season started on a strong note with big banks reporting excellent earnings. Capital markets revenues at these banks were boosted by the merger mania and trading boom.

Consumer spending is rising and likely to exceed pre-pandemic levels, which helps credit card businesses at banks. Loan growth is rising slowly but is expected to pick up if the economic recovery gains steam.

Interest rates have been rising since the Fed signaled it was ready to start tapering its massive bond purchase programs in November and could raise rates next year. A strong economy and higher interest rates benefit all banks’ profitability, but regional banks will benefit more since interest rate spread is their main source of earnings.

While valuations of financial stocks have expanded this year, they still look attractive when compared to the broader market.

The Financial Sector SPDR Fund (XLF - Free Report) is the most popular product in the space.  Berkshire Hathaway Inc. (BRK.B - Free Report) and JP Morgan (JPM - Free Report) are its top holdings.

iShares U.S. Broker-Dealers & Securities Exchanges ETF (IAI) provides exposure to investment banks, discount brokerages, and stock exchanges. Goldman Sachs (GS - Free Report) and. Morgan Stanley (MS - Free Report) are its top holdings.

The SPDR S&P Regional Banking ETF (KRE - Free Report) is an equal-weighted ETF. Please watch the short video above to learn more about these ETFs.