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JPMorgan's Rally Puts the Spotlight on Banking ETFs

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Wall Street saw some strength in the broad market indices on May 23. The rally can largely be attributed to the 6.2% rise in JPMorgan’s (JPM - Free Report) share price. The financial sector also witnessed the highest percentage increase of 3.2% on the same day.

The biggest U.S. bank by assets, JPMorgan brought back positive sentiments among other large U.S. banks and investors about the U.S. economy and the prospects of the banking sector. The bank’s CEO Jamie Dimon informed about reversing the guidance stated in January where they expected the financials to grapple from the rising costs, per a CNBC article. Bank showed confidence in its ability to hit the target of 17% return on tangible common equity in 2022 amid the rising rate environment. JPMorgan expects net interest income in 2022 to surpass $56 billion, exceeding the $50-billion forecast stated in January, as mentioned in a CNBC article.

Riding the tide, other major U.S. banks like Bank of America (BAC - Free Report) , Wells Fargo (WFC - Free Report) and Citigroup (C - Free Report) also rose at least 5% each. Moreover, the KBW Bank Index was up 4.1% on May 23.

Let’s study the following factors that can support the banking sector in details:

Rising Rate Environment

The central bank hiked the benchmark interest rates by 50 basis points on May 4, in line with the market projections. Notably, the hike highlights the biggest interest-rate increase since 2000. Suppressing investor projections of a 75-basis-point hike, the Fed indicated that it plans to keep the pace same for rate hikes over the next couple of meetings.

The current market environment can be highly beneficial to the banking sector in particular. This is because the rising rates will help boost profits for the banks. 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 the banks’ revenues, is likely to receive support from the steepening of the yield curve and a modest increase in loan demand.

Current U.S. Economic Scenario

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 deliver an enhanced performance.

Certain U.S. economic data releases have been encouraging so far. The Department of Commerce reported that retail sales in April were up 0.9% month over month, below the consensus estimate of 1%. Year over year, retail sales grew 8.2% in April.

April’s impressive U.S. industrial output data brought some hope despite the current market turbulence. Per the Fed’s recently-released data, total industrial production rose 1.1% in the month. It stood out as the fourth straight month of 0.8% gain or higher. Moreover, a 0.8% increase in the manufacturing output also looks positive. There was a 2.4% rise in utility production. Moreover, mining production witnessed a 1.6% uptick, mainly on strength in the oil and gas sector.

Banking ETFs in Focus

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

Invesco KBW Bank ETF (KBWB - Free Report) — up 4.1% on May 23

The 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. KBWB has an AUM of $1.96 billion and charges 0.35% as the expense ratio (read: Fed Rate Hike to Bring These ETF Areas to the Forefront).

First Trust Nasdaq Bank ETF (FTXO - Free Report) — up 3.9%

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. FTXO has an AUM of $263.9 million and charges an expense ratio of 0.60%.

iShares U.S. Regional Banks ETF (IAT - Free Report) — up 3.3%

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. IAT has an AUM of $897.5 million and charges 0.41% as expense ratio.

SPDR S&P Regional Banking ETF (KRE - Free Report) — up 2.5%

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. KRE has an AUM of $3.57 billion and charges 0.35% as expense ratio (read: Consider These ETF Areas to Buy the Dips).

SPDR S&P Bank ETF (KBE - Free Report) — up 2.5%

The 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. KBE has an AUM of $2.40 billion and charges 0.35% as an expense ratio (read: 4 Top-Ranked Sectors & Its ETFs to Play Amid Market Slump).

Key Takeaway

The U.S. banking sector seems rightly placed to gain from the rising interest rate environment as the economy is trying best to maintain a strong foothold amid all the odds. However, the threat of entering into recession is real as the Federal Reserve will keep tightening the monetary policy to tame the nearly 40-year high inflation levels.