Bank ETFs Soar on Trump Trade, September Rate Cut Bets

U.S. banks showed a strong comeback over the past week on bullish fundamentals in the space amid market rotation into undervalued segments. The probability of Donald Trump returning to the White House has risen significantly along with a Fed rate cut in September. Both are favorable for the banking sector. The robust second-quarter results of the banks also added to the strength.

Given the optimism, bank ETFs soared to a new one-year high. First Trust NASDAQ ABA Community Bank Index Fund QABA was the biggest winner, jumping 16.2% in a week. This was followed by gains of 15% for Invesco KBW Regional Banking ETF KBWR, 14.8% for SPDR S&P Regional Banking ETF KRE, 13.3% for SPDR S&P Bank ETF KBE and 11% for iShares U.S. Regional Banks ETF IAT.

Trump Trade Resurge

The banks are well-positioned to benefit from Trump's deregulation and lower corporate tax policies. One of the most notable potential benefits for banks would come from Trump's focus on deregulation. During his first term, Trump's administration rolled back several regulations that were imposed after the 2008 financial crisis. This deregulation reduced compliance costs and increased profit margins for banks. A second Trump term could see a continuation or even an expansion of these deregulatory efforts, providing a more favorable operating environment for financial institutions.

Fed Rate Cut Bets

The latest inflation data and Fed Chairman Jerome Powell's recent hints have bolstered bets that the central bank will act by September. Powell said the Fed wouldn't wait for inflation to get to its 2% target before it began cutting because of the lag effects of tightening. Traders are now 100% certain that the Federal Reserve will cut interest rates by September, per CME Group.

A rate cut after two years of tightening would be a big relief for midsize banks, which are struggling with the impact of high rates on their profits and their borrowers. Lower rates will brighten the lenders' earnings outlook in the coming quarters.

Solid Earnings

Big banks like Bank of America and Morgan Stanley saw a spike in their share prices on robust quarterly results. U.S. Bancorp and Citizens Financial Group also rose on positive quarterly results.

We have profiled the abovementioned ETFs below:
First Trust NASDAQ ABA Community Bank Index Fund – 52-Week High: $53.87

First Trust NASDAQ ABA Community Bank Index Fund offers exposure to the largest banks and thrifts or their holding companies that are designated as banks by the Industry Classification Benchmark. It tracks the NASDAQ OMX ABA Community Bank Index, holding 125 stocks in its basket.

First Trust NASDAQ ABA Community Bank Index Fund has accumulated $62.9 million in its asset base and trades in a volume of around 14,000 shares a day on average. It charges 60 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a High risk outlook.

Invesco KBW Regional Banking ETF – 52-Week High: $57.40

Invesco KBW Regional Banking ETF offers exposure to publicly traded U.S. regional banking and thrift companies by tracking the KBW Nasdaq Regional Banking Index. It holds 51 stocks in its basket, with none accounting for more than 4% of the assets.

Invesco KBW Regional Banking ETF is a relatively less popular and less liquid option in the space, with AUM of $53.8 million and an average daily volume of 4,000 shares. It charges 35 bps in fees per year from investors and has a Zacks ETF Rank #4 (Sell) with a High risk outlook.

SPDR S&P Regional Banking ETF – 52-Week High: $57.10

SPDR S&P Regional Banking ETF provides exposure to the regional banks segment by tracking the S&P Regional Banks Select Industry Index. It holds 141 stocks in its basket, with each accounting for no more than 2.3% of the assets.

SPDR S&P Regional Banking ETF has AUM of $2.8 billion and charges 35 bps in annual fees. It trades in an average daily volume of 12 million shares and has a Zacks ETF Rank #4 (Sell) with a High risk outlook.

SPDR S&P Bank ETF – 52-Week High: $53.19

SPDR S&P Bank ETF offers equal-weight exposure to 92 banking stocks by tracking the S&P Banks Select Industry Index. Regional banks dominate the portfolio with a 73.9% share, while diversified banks, commercial & residential mortgage finance, diversified financial services and asset management & custody banks take the remainder.

SPDR S&P Bank ETF has amassed $1.6 billion in its asset base while trading in a heavy volume of 1.4 million shares a day, on average. The product charges 35 bps in annual fees and has a Zacks ETF Rank #2 (Buy) with a High risk outlook.

iShares U.S. Regional Banks ETF – 52-Week High: $47.08

iShares U.S. Regional Banks ETF offers exposure to 35 small and mid-cap regional bank stocks by tracking the Dow Jones U.S. Select Regional Banks Index. It is largely concentrated on the top three firms with a double-digit allocation each.

iShares U.S. Regional Banks ETF has amassed $604.2 million in its asset base while seeing a good volume of 153,000 shares a day. The product charges 40 bps in annual fees and has a Zacks ETF Rank #3 with a High risk outlook.

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