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Taking What They Want And Leaving: Modest Departures From Bank ETFs

December 20, 2016 7:54 am
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For a while there, financial services stocks and the corresponding exchange traded funds were the talk of the town. ETFs such as the Financial Select Sector SPDR (NYSE: XLF) and the SPDR S&P Regional Banking ETF (NYSE: KRE) soared following Election Day.

Since November 9, the first trading session after Election Day, KRE, the largest regional bank by assets, is higher by a stellar 19 percent. That makes the 12.7 percent gained by XLF over the same stretch seem paltry by comparison. Either way, the financial services sector, the second-largest sector weight in the S&P 500, has trounced the 4.8 percent returned by the benchmark U.S. equity index since November 9.

In addition to post-election ebullience, bank stocks and ETFs were boosted by speculation that the Federal Reserve was nearing its first interest rate hike of 2016 at its December meeting, something the Fed obliged on.

Regional bank funds like KRE are seen as prime beneficiaries of higher interest rates. Simply put, net interest margins at regional banks have been suppressed by the Fed's zero interest rate policy and reversing that policy is seen as an important catalyst in boosting profits for the banks in ETFs such as KRE.

Albeit on a modest basis, to this points, there are signs bank ETFs are succumbing to profit-taking or money managers rotating into other sectors.

“In other activity, we saw some outflows into the recent leg-up in several Financial related ETFs late last week, XLF (SPDR Financials, -$300 million), KRE (SPDR Regional Banking, -$300 million),” said Street One Financial Vice President Paul Weisbruch in a note out Monday. 

XLF and rival financial services ETFs are rallying, in part, on expectations that President-elect Donald Trump will be more friendly on the regulatory front than his opponent Hillary Clinton and President Barack Obama. Translation: The Dodd-Frank Act is in the cross hairs of the Trump Administration and that could be a good thing for XLF and friends, but it's hard to bet on that scenario becoming reality in the near-term.

“These flows bear monitoring over the next couple of weeks as we approach the end of 2016, with major money managers looking to rebalance their holdings heading into the new year,” adds Weisbruch.

Disclosure: The author owns shares of XLF.

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