After a lackluster May, financial ETFs are recovering of late, a dovish Fed being the main reason. The Fed has not enacted any rate hike so far this year and is likely to remain patient in the future as well. There are high chances that the Fed will cut rates ahead given downbeat jobs, inflation and manufacturing data for the month of May as well as trade tensions (read: ETFs to Win After Soft May Jobs Data).
At the current level, according to CME FedWatch tool, there is a 55.1% chance of a 50-bp rate cut in the Sep 18 meeting, followed by a 23.3% probability of a 25-bp rate cut, 18.9% likelihood of a 75-bp rate cut and only 2.6% probability of a no-rate-cut scenario. Not only the Fed, several central banks like the ECB and BoJ are still practicing negative interest rate policies(read: ETF Strategies to Win If Powell Enacts Rate Cuts).
Research firm Evercore ISI said its base case scenario includes the fact that the Fed will “reluctantly cut rates three times starting in September in a mini-easing cycle” amid trade tensions, as quoted on Bloomberg (read: Why You Should Buy Growth ETFs & Stocks Now).
Steepening Yield Curve
As a result, short-term U.S. treasury yields retreated sharply. Increasing bets that the Fed will avert a recession through policy easing lowered recessionary fears and arrested the sharp decline in long-term yields. This is why long-term bond yields contracted at a lower rate than short-term ones, resulting in a steepening yield curve. Meanwhile, two-year Treasury yield note hit a one-and-half-year low lately.
The yield on the 10-year U.S. benchmark treasury bonds fell 5 bps to 2.10% in the Jun 11-Jun 13 phase while two-year treasury bond yields 10 bps to 1.83%. The spread between both the yields is widening. The spread between five- and 30-year yields is the maximum since 2017. NatWest Markets expects it to increase to 90 bps by year-end, from about 77 now.
This is an encouraging scenario for financial stocks as these companies take loans at short-term rates and lend at long-term rates. Against this backdrop, we highlight a few financial ETFs that have gained in the past week. Most of financial ETF winners are high-dividend paying products since yield-starved investors are looking for solid current-income.
ETFs in Focus
Invesco Global Listed Private Equity ETF (PSP - Free Report) (yields 3.17% annually), VanEck Vectors BDC Income ETF (BIZD - Free Report) (yields 9.44%),Invesco KBW High Dividend Yield Financial ETF (KBWD - Free Report) (yields 8.21%),Invesco S&P SmallCap Financials ETF (PSCF - Free Report) (yields 2.33%) andFirst Trust NASDAQ ABA Community Bank Index (QABA - Free Report) (yields 1.84%)added in the range of 0.7% to 1.8% in the past five days (as of Jun 13, 2019).
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