As confidence begins to build towards the U.S. economic recovery amid positive jobs data and consumer spending reports, investors are pouring into bank stocks as the sector is set to only benefit from economic growth.
While stocks have traded pretty flat throughout the week as investors digest rising inflation and possible near-term interest rate hikes from the Federal Reserve, the First Trust Nasdaq Bank ETF (NASDAQ: FTXO) is up nearly 39% for the year, while the S&P 500 (NYSE: SPY) is only up 12%. The most popular financial exchange-traded fund (ETF), the Financial Select Sector SPDR Fund (NYSE: XLF), is up 29%, rebounding from its 2020 lows.
Last year, XLF was one of the leading underperformers of the S&P 500 sector ETFs, with the sector being greatly impacted as the coronavirus pandemic rocked the U.S. and global economy and sowed pessimism towards any potential economic growth as interest rates were pulled near zero by the Fed.
Now, as Fed Chair Jerome Powell stated that the Fed is open to revising its loose Monetary Policy in future Federal Open Market Committee meetings, and U.S. Treasury Secretary Janet Yellen has signaled interest rates may need to rise to cool inflation, banks are one of the few sectors that are poised to benefit from rising rates as they profit more from loans, as traders are betting on those odds.
"The biggest factor driving flows into the financials has been a belief that 2020 marks a secular low point so far as interest rates and inflation," said Michael Harnett, chief investment strategist at Bank of America, reported by the Wall Street Journal. "Financial stocks were out of favor and underweight so why not but in if you see inflation and interest rate increases."
Investors now see bank stocks as relatively safe investments are market volatility has somewhat cooled from pandemic-era highs, and that the sector is only set to positively grow with an expanding economy.
Other banking ETFs that are outperforming the S&P 500 include the KBW Nasdaq Regional Banking Index (NASDAQ: KRX), the SPDR S&P Regional Banking ETF (NYSE: KRE), the KBW Nasdaq Bank Index (NASDAQ: BKX) and the iShares U.S. Regional Banks ETF (NYSE: IAT).