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This Was the Best Bank ETF in March

Sanghamitra Saha

U.S. financial equities ETFs had a roller coaster ride in March. While the possibility of faster Fed rate hikes was doing rounds to start the month and benefited bank stocks and ETFs, a dovish outlook for U.S. monetary policy in the Fed’s March meeting oozed all optimism out of this promising sector.

The Fed raised the benchmark interest rates by a modest 25 bps to 0.75–1% in mid-month, confirming the U.S. economy’s growth momentum, but forecast three rate hikes for 2017 as it did in December. Many expected four hikes this year thanks to the recent buoyancy on Trump’s promise of fiscal reflation and deregulation and the resultant rise in inflationary expectation.

But with Fed officials sticking to their outlook of two more rate hikes this year and three more in 2018, market watchers' expectations have weakened. Bond yields too started to decline post Fed meeting. Since banking stocks perform better in a rising rate environment, the scenario went against the sector. As a result, the sector was in the red in March (read: Will Trump & Fed Make 2017 a Year of Financials ETFs?).

Hopes Lit Up Again

Against the wavering economic backdrop and Trump’s failure to pull off the health care plan, Wall Street found some reasons to rejoice to close out the month.  U.S. GDP for the fourth quarter grew 2.1% compared with the previously reported 1.9%.

Plus, the Fed Bank of Boston President Eric Rosengren commented that four rate hikes may be justified in 2017 to defend the U.S. economy from overheating. San Francisco Fed president John Williams has also considered the possibility of “more than three hikes in total in 2017.” He sees the economy quite close to full employment and stable inflation.

The yield on 10-year U.S. Treasury notes spiked to 2.42% on March 30, 2017 from 2.39% from the day earlier. This offered the U.S. banking sector a new-found optimism as PowerShares KBW Bank ETF KBWB added over 1.8% on March 30, 2017. The gains helped the fund to lower its losses in the last one month (as of March 30, 2017) (read: 5 Top-Ranked Sector ETFs for a Promising Portfolio).

Are There Any Hidden Gems Amid Bloodbath?

The biggest financial ETF Financial Select Sector SPDR ETF XLF gained over 1.3% on March 30, 2017 while the fund was down 2.2% in the last one month (as of March 30, 2017). Most of the products in the sector have lost in the month.

Still, investors might want to know which product lost the least or if any ETF was able to survive the storm in March. On this ground, we find KBWB emerging as a winner. The 24-stock fund has amassed about $803.6 million in assets. Citigroup (8.36%), J.P. Morgan (8.20%) and Wells Fargo & Co (8.10%) are top three holdings of the fund. It charges 35 bps in fees.

And if we broaden the horizon and look at global financial ETFs,iShares MSCI Europe Financials EUFN comes out as the best performer. The 87-stock fund is heavy on Hsbc Holdings Plc (9.51%), Banco Santander SA (5.29%) and Allianz SE (4.99%). EUFN was up over 5.7% in the last one month (as of March 30, 2017).

Bottom Line

If KBWB was less beaten-down in March, then it should be on investors’ radar for the coming days. Investors should note that President Trump is eyeing to phase out the 2010 Dodd-Frank financial-overhaul law – one of the regulations undertaken in the height of the 2008 financial crisis.

The focus of the law was to cut back on uncontrolled lending and avoid the situation where tax-payers’ money is needed to bail out large financial institutions. The repealing of the rule is likely to push up bank stocks further. Plus, major banks have already come up with strong earnings reports in the latest reporting cycle, clearing the path for the banking ETF to outperform (read: 5 Top-Ranked Sector ETFs for a Promising Portfolio).

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SPDR-FINL SELS (XLF): ETF Research Reports
ISHARS-MS EU FN (EUFN): ETF Research Reports
PWRSH-KBW BP (KBWB): ETF Research Reports
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