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4 Reasons Why Bank ETFs Can Rebound in 2024

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The journey this year for bank ETFs has been anything but smooth. The largest bank ETF, Invesco KBW Bank ETF (KBWB - Free Report) , is off 4.9% so far this year. First, a regional banking crisis caused by the failure of three U.S. banks in the early part of the year and then a flattening yield curve weighed on the bank ETFs. However, the tables are probably turning for the segment as the rates are peaking and the yield curve is steepening. In fact, the ETF KBWB has surged 19.7% in the past six months (as of Dec 15, 2023).

Investors interested to play this catch-up trade may bet on SPDR S&P Bank ETF (KBE - Free Report) (up 27.2% past month), KBWB (up 24.5% past month) and First Trust Nasdaq Bank ETF (FTXO - Free Report) (up 25.8%). On the other hand, regional bank ETFs include iShares U.S. Regional Banks ETF (IAT - Free Report) (up 29.5% past month), SPDR S&P Regional Banking ETF (KRE - Free Report) (up 29.9% past month), Invesco KBW Regional Banking ETF (KBWR - Free Report) (up 29.3%) and First Trust NASDAQ ABA Community Bank ETF (QABA - Free Report) (up 25.2%).

Inside the Steepening Yield Curve

As recessionary fears are ebbing, inflation has been falling and the Fed is likely to cut rates from 2024, a steepening of the yield curve is expected next year. A steepening yield curve is great for bank stocks as the pattern boosts banks’ net interest rate margins.

Shares in U.S. banks rallied strongly last week after the Federal Reserve hinted at potential interest rate cuts in 2024 with the sector returning to its highest level since early March 2023 just before the start of the regional banking crisis. Wells Fargo and BofA Global Research analysts raised price targets across the banking sector in wake of the Fed's dovish pivot last week.

Cheaper Valuation of Bank ETFs

Most bank ETFs have a cheaper valuation than the S&P 500. Invesco KBW Bank ETF (KBWB - Free Report) , SPDR S&P Bank ETF (KBE - Free Report) and First Trust Nasdaq Bank ETF (FTXO - Free Report) have a P/E of 9.38X, 6.85X and 9.49X versus SPDR S&P 500 ETF Trust’s (SPY - Free Report) P/E of 17.86X. This indicates that the bank ETFs are undervalued with better growth prospects.

BofA Global Research analyst Ebrahim Poonawala said in a research note issued early on Thursday that the KBW Bank index was still trading at about a 50% discount to the S&P 500 even after outperforming the benchmark since its October lows, as quoted on Reuters.

Rallying stock and bond markets will likely boost large banks segments including wealth management, capital markets and credit according to Rick Meckler, partner at Cherry Lane Investments, who also noted that banks are among underperforming sectors "playing catch-up" in the market, as quoted on Reuters.

Upbeat Earnings of Big Banks

Amid crisis in regional banks at the start of the year, many account holders have shifted their funds at big banks. Plus, robust consumer and commercial banking businesses and solid loan balance have supported big banks this year. The financial sector, which accounts for around one-fifth of the S&P 500 Index, had an upbeat Q2 earnings reason. All six big U.S. banks were able to beat overall in Q2 (read: Bank ETFs in Focus on Upbeat Earnings).

Banking Indicators Point to a Positive Recovery

Regional deposits and loans also rose lately. The surge in sentiment can be seen in the future as well, as the Fed has given indication that rates have been peaking. Investors are speculating that the Fed will halt rate increases next year and even cut rates by 75 bps in 2024.

In contrast to earlier projections of a 0.50% rate cut, the Fed now anticipates a series of three 25-basis-point rate cuts in 2024. This predicted policy change could stimulate stock growth, especially in regional bank stocks, since experts believe the banking crisis was triggered by a sharp increase in interest rates over the past year.


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