EC Banks Serving Up Big Gains

And what about inflation? Rising rates at the long end of the curve bespeak heightened inflationary expectations. Indeed, the 10-year breakeven inflation (BEI) rate has spiked more than 160 basis points over the past year and looks to top 3% before the current cycle ends.

Inflation vs. Inflation Expectations

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Because of the accelerating economy, inflation’s becoming a concern for the markets. Rising housing costs, hikes in meat and grain prices, together with mounting costs for energy and motor vehicles, are now being clocked at double-digit rates, offset to some degree by declines in the pricing of leisure activities (cinemas, theme parks, cruise ships, etc.) beset by COVID-19 fears.

The Fed’s not likely to raise rates until it sees full employment and inflation in excess of 2% per annum. All that’s dependent on consumers’ and businesses’ willingness to spend and invest once they feel they’re getting past the coronavirus threat. Given the currently accelerating data points and factoring in another $1+ trillion stimulus, the first Fed Funds rate hike seems likely in the first half of 2022.

So does this rate trend and by extension, the strength of the financial sector, have legs? In a word, yes. For a year at least.

The greatest beneficiaries of the rotation to date have been regional and community banks which investors can easily access through five index ETFs:

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Financial ETFs

The First Trust Nasdaq Bank ETF (FTXO) selects its holdings on the basis of their liquidity and weights them on volatility, value, and growth factors. In 2021, the fund’s gains have topped the table at 26 percent.

Equally weighting its constituent stocks, the Invesco KBW Regional Banking ETF (KBWR) skews toward smaller stocks and has climbed 24% since the top of the year.

The SPDR S&P Regional Banking ETF (KRE) portfolio is also equal-weighted, subject to liquidity constraints, and has matched the year-to-date performance of its KBWR peer.

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Disclosure: Brad Zigler pens's Alternative Insights newsletter. Formerly, he headed up marketing and research for the Pacific Exchange's (now NYSE Arca) option ...

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