The operating backdrop of the U.S. banking sector has lately turned favorable despite concerns over the financial health of Deutsche Bank and Wells Fargo (WFC - Free Report) . Bullish earnings, the possibility of a Fed rate hike by the end of this year and chances of an oil output curb deal by the OPEC in November have been instrumental in building up this backdrop (read: Financial ETFs in Focus on Wells Fargo's Sales Scandal).
If we go into the details, most of the big banking companies came up with a beat on both lines in the Q3 reporting cycle. Drivers of the outperformance were a rise in fixed income, currency and commodities trading revenue, higher mortgage banking income and moderate investment banking business (read: U.S. Banks Clear Stress Test: Financial ETFs in Focus).
U.S. banks have significant exposure to the long-beleaguered energy sector. But lately, with the oil price recovery, tension over credit default seems to be diminishing. Several big banks witnessed a reduction in losses arising out of loans to the energy sector, as per an article published in Financial Times. And finally, chances of a rising rate environment with the possibility of a Fed rate hike this year will benefit banking ETFs (read: Buy Bank ETFs for Q4 on Bullish Earnings, Fed & Oil).
Brexit: The New Boon?
If these were not enough, the decision of British citizens to cut ties with the European Union in June end might make matters more favorable for banking stocks and ETFs. But investors should not forget that as soon as Britain leaves the EU, its importance as a corporate transit to the rest of Europe would be lost, going by an article in CNBC. Many global financial institutions may even want to shift their base from London.
Even an article published in Wall Street Journal indicated that “almost 5,500 U.K. financial firms rely on “passporting rights” to do business across Europe and their loss could pose “significant” risks to those banks, according to the U.K. parliament’s Treasury Select Committee.” In such a backdrop, Goldman Sachs Group believes that there could be high chances of U.S.-based banks getting the share lost by the UK banks.
If Britain pursues a ‘hard Brexit’, then this fear may come true and U.S. banks may be in a beneficial position. Thus, investors, who have pinned their hopes on this fundamental, can play iShares U.S. Financial Services ETF (IYG - Free Report) , PowerShares KBW Bank ETF (KBWB - Free Report) , Financial Select Sector SPDR (XLF - Free Report) and Vanguard Financials ETF ((VFH - Free Report) ) (see all Financial ETFs here).
These funds have considerable exposure in big banking stocks and returned in the range of 0.6??? 4% in the last one month (as of November 2, 2016) against a 3% loss seen in the S&P 500-based ETF SPDR S&P 500 ETF (SPY - Free Report) .
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