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Fed Rate Hike in the Cards: Banking ETFs Likely to Gain

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Investors have been paying more attention to the banking sector of late, considering its improving performance over the past year. The S&P Banks Select Industry Index has surged 35.7% in the past year compared with the broader S&P 500 Index’s rise of 26.1%.

Several factors are working in favor of the space. Federal Reserve has already started tapering the bond purchases, which it expects to complete by March this year. The Fed is expected to begin raising its benchmark interest rate in March. The shift toward a tighter monetary policy will push yields higher, thereby helping the financial sector. This is because rising rates will help in boosting profits for banks, insurance companies, discount brokerage firms and asset managers. The steepening of the yield curve (the difference between short and long-term interest rates) is likely to support banks’ net interest margins. As a result, net interest income, which constitutes a chunk of banks’ revenues, is likely to receive support from the steepening of the yield curve and a modest rise in loan demand.

There are possibilities of the Federal Reserve taking a more aggressive approach in raising interest rates. In this regard, the minutes from the Fed’s December meeting read that “Participants generally noted that, given their individual outlooks for the economy, the labor market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated,” as mentioned in a CNBC article.

The coronavirus vaccine rollout is gradually helping control the spread of the outbreak across the globe. The optimism surrounding the gradual reopening of global economies and increasing demand is painting a rosy picture for cyclical sectors. The progress in coronavirus vaccine rollout presents a strong case,favoring a faster return to normalcy and economic recovery. As the economy starts operating in full swing, banks will be able to generate more business.

Moreover, the emergency use authorization (EUA) for Pfizer Inc.’s (PFE) antiviral COVID-19 pill, PAXLOVID, has relaxed concerns regarding Omicron to some extent. Pfizer can begin delivering PAXLOVID in the United States on an immediate basis. In November, Pfizer had informed about signing an agreement with the U.S. government to supply 10 million treatment courses of PAXLOVID. The delivery will be completed in 2022. The FDA had also granted a nod to Merck’s antiviral pill for COVID-19.

Banking ETFs in Focus

Against this backdrop, let’s take a look at some banking ETFs that can gain from the current environment:

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

SPDR S&P Regional Banking ETF seeks to provide investment results that before fees and expenses generally correspond to the total return performance of the S&P Regional Banks Select Industry Index. It has AUM of $4.98 billion and charges 0.35% in expense ratio (read: Bet on These 5 ETF Areas for 2022).

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

SPDR S&P Bank ETF seeks to provide investment results that before fees and expenses generally correspond to the total return performance of the S&P Banks Select Industry Index. It has AUM of $3.14 billion and charges 0.35% in expense ratio (read: Best ETF Strategies for 2022).

Invesco KBW Bank ETF (KBWB - Free Report)

Invesco KBW Bank ETF 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 $2.81 billion and charges 0.35% in expense ratio (read: 7 ETF Predictions for 2022).

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

iShares U.S. Regional Banks ETF intends to track the investment results of an index composed of U.S. equities in the regional banks sector. It has AUM of $1.46 billion and charges 0.41% in expense ratio.

First Trust Nasdaq Bank ETF (FTXO - Free Report)

First Trust Nasdaq Bank ETF 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 $305.2 million and charges 0.60% in expense ratio (read: 5 ETFs Soaring to Start 2022).