2 Layers To This Trump Trade

As has been well-documented, financial services sector has been thriving since Donald Trump's surprising victory in the November U.S. presidential election. Since November 9, the first trading day after Election Day, the Financial Select Sector SPDR Fund XLF, the largest exchange-traded fund tracking the S&P 500's second-largest sector weight, is higher by 11.1 percent.

In addition to post-election ebullience, bank stocks and ETFs were boosted by speculation that the Federal Reserve was nearing its first interest rate hike of 2016 at its December meeting, something the Fed obliged on. Some bond market observers believe the Fed could raise rates several times this year, which could provide another boost to bank stocks and ETFs.

Interest Rates, Tax Reform And The Market

It is not just interest rate bets and speculation that Trump will move to undo some Obama-era regulations that hampered bank stocks that are powering ETFs like XLF and the SPDR KBW Regional Banking (ETF) KRE higher. KRE, the largest regional bank, is up nearly 16.9 percent since November 9.

Trump's effort at tax reform are seen as potentially efficacious for domestically-focused sectors, such as financial services.

“If implemented, Trump’s tax cuts could increase S&P 500 companies’ earnings by $180 billion, according to Barclays, although differences in effective tax rates mean the impact on industries would vary greatly as the tax cut is on domestic income,” said State Street Vice President David Mazza in a recent note. “Therefore, industries with a heavy concentration of domestic income — such as retail, road and rail firms within the transportation industry, and regional banks — could benefit the most, while technology and biopharma could benefit the least.”

KRE

Regional bank funds like KRE are seen as prime beneficiaries of higher interest rates. Simply put, net interest margins at regional banks have been suppressed by the Fed's zero interest rate policy and reversing that policy is seen as an important catalyst in boosting profits for the banks in ETFs such as KRE.

“Barclays estimates the top quintile of stocks that stand to gain the most from Trump’s plan to cut the corporate tax rate could see earnings rise by a median of 30 percent, while those benefiting the least could get a 6 percent bump,” added Mazza.

KRE, which follows the S&P Regional Banks Select Industry Index, holds 101 stocks and has a trailing 12-month dividend yield of 1.43 percent. KRE is an equal-weight ETF.

Disclosure: Todd Shriber owns shares of XLF.