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Play Banking Bonanza with These ETFs in Trump World

U.S. President-elect Donald Trump’s unexpected victory over Clinton proved to be a bonanza for banking stocks and ETFs. Not only banking stocks, most financial securities are now flying high.

As it is, historically, financial stocks have performed better with republicans in the White House thanks to their tolerant policies. Moreover, benchmark U.S. Treasury bond yields climbed to 2.07% on November 9 from 1.88% the day earlier, marking the largest one-day rise since July 2013. And on November 10, the benchmark U.S. Treasury bond yield added another 8 bps. In a nutshell, the yield curve is steepening.

The U.S. saw a 2% benchmark yield for the first time in over nine months. Trump’s promises to cut taxes and boost spending plans particularly on infrastructure boosted inflation expectations, pushing bond yields higher (read: ETF Strategies for a Rising Rate Environment).

As a result, financial ETFs especially that deal with banking, kept on hitting 52-week highs post-election. Regional banking ETFs are particularly enjoying a successful run (read: Sector ETFs Hitting 52-Week High on Trump's Victory).

Why Are Banking Stocks Celebrating?

Sharp Jump in Long-term Yields

This steepening of the yield curve was a tailwind for banking stocks as this improves banks' net interest margins. This is because interest rates on deposits are usually tied to short-term rates while loans are often tied to long-term rates.

Since short-term rates are still subdued in the U.S. and rise in short Treasury bond yields has been negligible in recent times, the spread between short and long-term yields increased. This in turn should boost banks’ profits. 

Easy Regulatory Policies in the Cards for Small Banks?

As per Wall Street Journal, Trump viewed the Dodd-Frank regulatory revamp as needlessly strict on smaller banks. The Dodd-Frank Act is a U.S. federal law that entrusts the government with the regulation of the financial industry. And now, with the republicans taking control of both the house and the senate, many have started to speculate that “new fiduciary-duty rules on brokerage firms might also be curtailed.”

However for big banks, things are not that rosy as Trump intends to separate the big banks’ commercial and investment banking arms (read: Trump Triumphs: Stocks & ETFs to Rock or Shock).

Bright Earnings Picture in Q3

The third-quarter earnings season went well for the banking sector. While an impressive 5.3% earnings growth was recorded, 86.7% of major banks beat on the bottom line. These banks saw revenues growing 3.7%, and 73.3% of these beat on the top line, as per the Earnings Trends issued on November 9, 2016 (read: Buy Bank ETFs for Q4 on Bullish Earnings, Fed & Oil).

Coming to Banks & Thrifts, a 100% beat ratio for both the top and the bottom line was recorded while 33.2% and 12.5% growth was logged, respectively. Overall, the financial sector witnessed 12.2% growth in earnings on 5.6% higher revenues. The beat ratio was 73.3% for earnings and 75.6% for revenues.

ETFs to Buy

Banking on all the positives elucidated above, below we highlight a few investment choices:

PowerShares KBW Regional Bank ETF KBWR

First Trust NASDAQ ABA Community Bank ETF QABA

PowerShares S&P SmallCap Financials ETF PSCF

SPDR S&P Regional Banking ETF KRE


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SPDR-KBW BANK (KBE): ETF Research Reports
SPDR-KBW REG BK (KRE): ETF Research Reports
PWRSH-KBW RBP (KBWR): ETF Research Reports
FT-NDQ ABA CBIF (QABA): ETF Research Reports
PWRSH-SP SC FIN (PSCF): ETF Research Reports
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