Bank ETFs Surge As Yield Curve Steepens

The banking corner of the broader financial sector is back on track this month owing to the steepening of the yield curve. Bargain hunting also added to some gains.

The yield curve steepened with the spread between the 10-year and two-year widening to 63 basis points. The move came as President Donald Trump supported the $25 billion worth new payroll assistance for struggling U.S. passenger airlines and another $135 billion payroll protection program for small businesses. This piece of news was welcomed by investors after Trump put off the coronavirus stimulus package talks to post elections.

Additionally, the market continued to price in for the victory of Democratic candidate Joe Biden in next month's presidential elections, pushing the curve to steeper levels. This is because a Biden victory and a Democratic sweep in Congress will result in higher fiscal spending and more Treasury supply.

As banks seek to borrow money at short-term rates and lend at long-term rates, a steepening yield curve will earn more on lending and pay less on deposits, thereby leading to a wider spread. This will expand net margins and increase banks profits.

Given this, bank ETFs have been on the rise this month. In fact, Invesco KBW Regional Banking ETF (KBWR - Free Report)SPDR S&P Regional Banking ETF (KRE - Free Report)First Trust NASDAQ ABA Community Bank Index Fund (QABA), and SPDR S&P Bank ETF (KBE - Free Reportgained in double-digits at the start of October and carry a Zacks ETF Rank #3 (Hold).

KBWR

This fund follows the KBW Nasdaq Regional Banking Index, holding 51 stocks in its basket. It is a relatively less-popular and less-liquid option in the space with AUM of $27 million and average daily volume of 5,000 shares. It charges 35 bps in fees per year from investors.

KRE

This fund, having AUM of $1.2 billion and average trading volume of 8.3 million shares, offers exposure to regional banks. It follows the S&P Regional Banks Select Industry Index, charging investors 35 bps a year in fees. KRE holds 126 securities in its basket.

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