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Bank ETFs are Getting Their Acts Together

Financial services exchange traded funds, including the Financial Select Sector SPDR (XLF) and the SPDR S&P Bank ETF (KBE) , have scuffled a bit this year as the Federal Reserve has held off on raising interest rates.

While there are few signs that the Fed will reverse course before the end of the year, bank ETFs such as KBE are starting to perk up. The financial sector received a boost from Presidential candidate Donald Trump after he proposed dismantling nearly all of Dodd-Frank, the package of financial reforms placed after the global financial crisis. However, the Fed has proved uncooperative when it comes to boosting rates and the latest FOMC minutes reveal the central bank’s concerns about the labor market, decreasing the likelihood of near-term rate hikes.

Related: Financial Sector ETFs Maintain Momentum

The Russell 2000 Financial Services Index, a small-cap index of financial sector stocks, rose 7.8% this year on higher earnings and dividends as investors focused on domestically oriented banks that were less affected by global problems, reports Bailey Lipschultz for Bloomberg.

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The divergence between the small- and large-cap segments is now at its widest in four years, with smaller financial services companies rising while large-cap banks were down 0.8%.

Investors can play that theme with ETFs such as the First Trust NASDAQ ABA Community Bank Index Fund (QABA) and the PowerShares S&P SmallCap Financials Portfolio (PSCF) .

Regarding KBE, “neither the volume nor the flat averages is a deal breaker. What could be is rather strong chart resistance from the late-May/early-June highs, as the banking ETF peaked ahead of the Brexit vote. In other words, breaching May-June resistance will be important for investors to once and for all shake off their Brexit fears,” reports Michael Kahn for Barron’s.

Looking ahead, analysts project small-cap bank stocks to increase earnings by 22% this year and 11% in the next, compared to a 6% and 10% rise for those in the S&P 500.

Related: Potential With a Small-Cap Bank ETF

Moreover, after underperforming the broader market, financials may soon get their moment in the sun as a value play.

“The bottom line is that banks and financial stocks in general are finally back in the hunt. They are far from market leaders, but having them at least participate in the upswing makes the broader market’s job just a little bit easier,” according to Barron’s.

For more information on banks sector, visit our financial category.

SPDR S&P Bank ETF

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.