The largest bank ETF has seen inflows of more than $1.5 billion in recent weeks despite concerns around monetary policy and regulatory reform from Capitol Hill.
The $25 billion Financial Select Sector SPDR Fund – USD (XLF) has picked up in terms of inflows so far in the third quarter, with year-to-date flows at $1.6 billion, after losing around $300 million by the end of Q2.
Investors remain hopeful that banks will profit in a time of rising interest rates and potential tax and regulatory reform under the Donald Trump administration.
Globally, banking stocks that are tracked by ETFs have gathered more than $3.1 billion since 1 January.
But the lack of certainty from the White House has temporarily seen demand for big loans diminishing, and over the long term investors have seen a decline in long-term rates. Treasury yields have declined over the second quarter.
Several ETFs have seen significant outflows so far in 2017 as a result, including the iShares US Financials ETF (IYF) which has lost more than $60 million, and the PowerShares Financial Preferred Portfolio ETF (PGF), which has shed close to $70 million.
“Despite the decline in share prices of JPMorgan and Citigroup on Friday after they reported earnings, bank stocks could see further upside if the yield curve steepens and inflation picks up,” Mark Tepper, president of Strategic Wealth Partners, told CNBC.
Will Fed raise rates and boost bank ETFs?
Weighing on banks, however, are reports that the Fed will not raise rates again this year.
The Fed has already raised rates twice this year, with the most recent in June.
With a wider spread between short and long-term Treasuries, banks could still benefit from improved net interest margins or more profits and companies borrow short and lend long.
“A steeper yield curve, which describes a condition in which the longer-term Treasury yields rise in relation to shorter-term yields, is often considered bullish for the banks as they often lend in the longer term and borrow money in the short term,” according to CNBC.
Tepper added that banks looked well-positioned in terms of their balance sheets, “given the fact that they all just crushed the stress tests”.