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Why Financials ETFs Are On Fire

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The financials sector was among the worst-performing sectors earlier this year; it is now outperforming the S&P 500 year-to-date, with a gain of 24.4%, versus S&P 500’s 22.7%. And it is one of the best performing sectors if we look at the past three months.

The yield curve, which had inverted earlier, is now back to its normal shape. The Fed began buying short-term Treasury debt last month as it tries to keep the money markets functioning smoothly. Further, optimism regarding trade talks sent the 10-year yield surging 15 basis points to 1.96%, its biggest jump since November 2016.

Because an inverted yield curve is a signal of an impending recession, it is bad for banks. A steepening yield curve is also good for bank earnings, particularly regional banks’. And yields have been rising in other parts of the world too.

Better than expected earnings and jobs report have also boosted banks. Any progress in trade negotiations would boost global economic growth and benefit big banks.

Many investors are now looking at earlier beaten down sectors that look attractively valued.

The Financial Select Sector SPDR Fund (XLF) is the most popular and one of the cheapest financials ETFs. It holds companies in the diversified financial services, insurance, banks and capital markets industries.

Berkshire Hathaway Inc. (BRK.B - Free Report) and JPMorgan Chase (JPM) are its top holdings. 

The Invesco KBW Bank ETF (KBWB) follows a market weighted index of US banking firms. JPMorgan Chase (JPM), Bank of America (BAC) and Citi (C ) are its top holdings.

SPDR S&P Regional Banking ETF (KRE) is an equal-weighted ETF of regional banking firms.

To learn more about these ETFs, please watch the short video above.

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