Why Bank ETFs Are Rising

The banking corner of the broader financial segment has been on a roll buoyed by stronger-than-expected earnings, bargain hunting and the steepening of the yield curve. Notably, the yield curve, which had inverted in late August, has now steepened on the back of steady and resilient economy.

Though consumer confidence and factory activity dipped for the fourth consecutive month in November amid fears of trade war consumer spending, which accounts for more than two-thirds of U.S. economic activity, is rising modestly. The job market also strengthened in November with the fastest pace of job additions and unemployment falling to the lowest level since 1969. Also, third-quarter GDP growth was revised upward recently from 1.9% to 2.1%.

Additionally, the housing market is clearly showing signs of a strong recovery on lower mortgage rates and slower home price growth. Stepped-up economic activities will lead to high demand for banking industry. Rising oil prices are also acting as catalysts given that most banks are highly exposed to the energy sector.

Further, trade optimism boosted risk-on sentiments, leading to rise in yields, and thus fueled a rally in banking stocks. As banks seek to borrow money at short-term rates and lend at long-term rates, a steepening yield curve will expand net margins and bolster banks’ profits. Any progress in trade negotiations would boost global economic growth and benefit big banks.

Given this, bank ETFs are back on track in the final quarter of the year after being under pressure due to a flattening curve early this year. These funds will continue to see smooth trading to end the year should the same trends prevail. These funds have a Zacks ETF Rank #3 (Hold).

Invesco KBW Bank ETF (KBWB - Free Report) – Up 11.5%

This fund provides exposure to 24 companies primarily engaged in U.S. banking activities by tracking the KBW Nasdaq Bank Index. It is concentrated on the top five firms that make up for more than 7% share each. The fund has managed $613.5 million in its asset base and trades in solid volume of 425,000 shares per day on average. Expense ratio comes in at 0.35%.

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