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Big Bank ETF Boom Right Around the Corner? Maybe


It is possible that an already strong year for financial services exchange traded funds could get even more impressive.

The traders’ favorite, the Financial Select Sector SPDR (XLF) , is higher by 30% this year, while the Vanguard Financials ETF (VFH) is up 28%. The SPDR S&P Regional Banking ETF (KRE) , which benefited as investors turned to regional  banks when interest rates spiked earlier this year, has surged 38%. [Regional Bank ETF Breaks to new High]

A steepening yield curve could be the next catalyst to boost bank ETFs and at least one technician is eying the KBW Bank Index.

“The KBW banks Index (BKX) is consolidating within the rising channel from late 2012 and is set up for a breakout that would set up a rally to channel resistance at 74-75. A break above 67 for the BKX would would complete the bullish consolidation…,” said Bank of America Merrill Lynch technical strategist Stephen Suttmeier in part of a note posted by Josh Brown on The Reformed Broker.

Good news: The KBW Bank Index is the underlying index for the $169 million PowerShares KBW Bank Portfolio (KBWB) , which is up 26% year-to-date. Suttmeier’s comments may have been behind KBWB’s volume eclipsing five times the daily average on Tuesday. [Bank ETFs: Regionals or Large-Caps?]

“Also, a steepening of the yield curve (10-year Treasury yields minus 2-year Treasury yields) tends to coincide with stronger relative price performance for the BKX vs. the S&P 500,” added Suttmeier.

If the KBW Bank Index does in fact breakout, Suttmeier likes J.P. Morgan Chase (JPM), Wells Fargo (WFC) and Citigroup (NYSE: C) “the best in the group as they’ve all consolidated, held important support levels and are set-up to go,” according to Brown.

Those stocks combine for nearly a quarter of KBWB’s weight. As of the end of the third quarter, the KBW Bank Index was slightly ahead of the S&P Financials Index, according to PowerShares data.

KBWB Top-10 Holdings

Chart Courtesy: BAML via Reformed Broker