Grab Banking ETFs Now to Reap Gains From Hawkish Fed
The world’s largest economy is expected to witness its first interest rate hike since 2018 on Mar 16 after the central bank winds up its two-day meeting. Federal Reserve chair Jerome Powell had earlier proposed a quarter-point hike instead of a half-point, largely due to uncertainty related to the Russia-Ukraine war crisis. The tightening monetary policy seems mandatory as inflation levels are currently at a 40-year high amid improving employment conditions.
Followed by interest rate hikes, market participants will also be looking to study the Fed’s projection of further rate hikes this year. According to a CNBC Fed survey, the central bank is expected to raise the benchmark interest rates at least for an average of 4.7 times in 2022. The rates are estimated to stand at 1.4% at the end of this year and 2% by 2023-end. Analysts will also be searching for hints on Federal Reserve’s plans on the timing and process of shrinking its $9-trillion balance sheet.
However, the Russia-Ukraine conflict and China’s surging COVID-19 cases can make it difficult for the Federal Reserve to take a very strict stand. Higher commodity prices and global supply-chain disruptions from these factors may induce higher inflation. Despite strong fundamentals, high inflation levels and interest rates may slow down the U.S. economic growth.
The current market environment can be highly beneficial to the banking sector in particular. This is because the rising rates will help boost profits for the banks. The steepening of the yield curve (the difference between short and long-term interest rates) is likely to support banks’ net interest margins. As a result, net interest income, which constitutes a chunk of the banks’ revenues, is likely to receive support from the steepening of the yield curve and a modest rise in loan demand.
The progress in coronavirus vaccine rollout presents a strong case,favoring a faster return to normalcy and economic recovery. As the economy starts operating in full swing, banks will be able to deliver an enhanced performance.
Banking ETFs in Focus
Against this backdrop, let’s take a look at some banking ETFs that can gain from the current environment:
SPDR S&P Regional Banking ETF KRE
SPDR S&P Regional Banking ETF seeks to provide investment results that before fees and expenses generally correspond to the total return performance of the S&P Regional Banks Select Industry Index. KRE has an AUM of $5.81 billion and charges 0.35% as expense ratio (read: 5 ETFs to Tackle Ukraine-Russia War, Inflation & Fed Rate Hike Woes).
SPDR S&P Bank ETF KBE
The SPDR S&P Bank ETF seeks to provide investment results that before fees and expenses generally correspond to the total return performance of the S&P Banks Select Industry Index. KBE has an AUM of $3.21 billion and charges 0.35% as an expense ratio (read: Best ETF Strategies for 2022).
Invesco KBW Bank ETF KBWB
The Invesco KBW Bank ETF is based on the KBW Nasdaq Bank Index. The index is a modified-market capitalization-weighted index of companies, primarily engaged in U.S. banking activities. KBWB has an AUM of $2.76 billion and charges 0.35% as the expense ratio (read: Fed Rate Hike to Bring These ETF Areas to the Forefront).
iShares U.S. Regional Banks ETF IAT
iShares U.S. Regional Banks ETF intends to track the investment results of an index composed of U.S. equities in the regional banks sector. IAT has an AUM of $1.40 billion and charges 0.41% as expense ratio.
First Trust Nasdaq Bank ETF FTXO
First Trust Nasdaq Bank ETF seeks investment results that correspond generally to the price and yield, before fees and expenses, of the Nasdaq US Smart Banks Index. The index is a modified factor-weighted index, designed to provide exposure to U.S. companies within the banking industry. FTXO has an AUM of $360.8 million and charges an expense ratio of 0.60%.
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SPDR S&P Bank ETF (KBE): ETF Research Reports
SPDR S&P Regional Banking ETF (KRE): ETF Research Reports
Invesco KBW Bank ETF (KBWB): ETF Research Reports
iShares U.S. Regional Banks ETF (IAT): ETF Research Reports
First Trust NASDAQ Bank ETF (FTXO): ETF Research Reports
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