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Volcker Rule Eased: 2 Hot ETF Areas to Bet on

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On Jun 25, financial regulators announced that they would ease the financial-crisis era Volcker Rule. Federal financial regulators said they plan to make it easier to let banks invest in venture capital funds and relax some limitations on derivatives trading. The moves, which include easing of some of the more burdensome parts of the so-called Volcker Rule, boosted bank stocks.

The Volcker rule was formulated to prohibit banks that receive federal and taxpayer backing in the form of deposit insurance and other support from engaging in risky trading activities. The purpose was to lower risks associated with some specific investment activities.  The rule was named after Paul Volcker, a former chairman of the Federal Reserve Board.

The Volcker Rule, which is Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, was scheduled for implementation in Jul 21, 2010, but was repeatedly delayed. On Dec 10, 2013, the Volcker Rule was approved. On Dec 10, 2014, the Rule was implemented and took effect from Apr 1, 2014.

The move was not surprising as the Trump administration always wanted deregulation in the banking sector. President Donald Trump signed a bill rolling back certain bank regulations into law in May 2018. That move helped regional banks a lot.

Against this backdrop, below we highlight a few ETF investing areas that could be targeted to realize sone gains.

Bank – SPDR KBW Bank (KBE - Free Report)

No doubt, the easing of Volcker rule would give a shot in the arm to big banks to boost their profitability. However, investors should note that in its latest stress test the Fed capped bank dividend payments and halted share-buybacks for the third quarter.

But with the coronavirus-led slowdown and prolonged recession fears doing rounds, such a Fed move is quite expected and is less likely to dampen the euphoria caused by the loosening of Volcker rule. In fact, stringent Fed instructions ensure the safety of the banks’ financial position. Notably, the annual stress test found that several banks could get uncomfortably close to minimum capital levels amid the pandemic, per CNBC.

As a result, the entire financial and banking sector was charged up on Jun 25. KBE gained 3.3% on Jun 25 while Financial Select Sector SPDR Fund (XLF - Free Report) (which is heavy on big banks) added about 2.65%. XLF invests about 20% in banks like J.P. Morgan, Citigroup, Wells Fargo, Goldman Sachs and Bank of America. No stock accounts for more than 1.68% of the fund KBE.

Private Equity – Invesco Global Listed Private Equity ETF (PSP - Free Report)

Since big banks are now allowed to invest in private equity funds, we can expect a rally in this asset class too. The fund is based on the Red Rocks Global Listed Private Equity Index. The underlying index of the fund includes securities, ADRs and GDRs of 40 to 75 private equity companies, respectively, including business development companies, master limited partnerships and other vehicles whose principal business is to invest in, lend capital to or provide services to privately held companies (collectively, listed private equity companies). The fund gained 1.88% on Jun 25.

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