4 Reasons Why Bank ETFs Have More Room To Rally

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Bank ETFs have registered upbeat gains this year with First Trust NASDAQ Bank ETF (FTXOFree Report) adding as much as 31.6% in the past three-month frame. The next winner is Invesco KBW Regional Banking ETF (KBWR - Free Report), which has gained 30.64%. Broad-based financial ETF Vanguard Financials ETF (VFH - Free Report) has also added 17.7% during the period.

We expect the rally could continue based on the below-mentioned reasons, barring some occasional drop-offs.

Fed to Okay Shareholder Value Maximization if Stress Test is Cleared

The Federal Reserve will put an end its restrictions on bank dividends and buybacks for most institutions on June 30 given that they clear the current round of stress tests, the central bank recently announced. Otherwise, restrictions will continue through Sept. 30. The results of this year's test will be released on July 1.

Last year, several U.S. banks — Bank of America (BAC), Bank of New York Mellon (BK), Citigroup (C), Goldman Sachs (GS), JPMorgan Chase (JPM), Morgan Stanley (MS), State Street (STT), and Wells Fargo (WFC) — suspended share buybacks as the coronavirus crisis roiled businesses.

Wall Street's biggest banks were also required to cap shareholder dividends in the third quarter of 2020 to the amount paid in the second quarter as a COVID-19 safety measure, per a CNN article.

Federal Reserve restrictions were enacted last year to boost banks’ capital and to ensure that financial institutions remained ready to lend to those affected by the coronavirus pandemic. The Fed’s decision came at an opportune moment, as banks have been benefiting from higher interest rates.

Steepening Yield Curve

With the Fed being dovish and economic improvements boosting long-term yields, the yield curve will likely steepen ahead. The biggest winner of the steepening yield curve is the financial sector.

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