US Financial ETFs Really Like Trump

November 14, 2016

Headed into the U.S. presidential election, the financial sector was underperforming the broader S&P 500. But since Donald Trump’s victory, financials are now a runaway gainer, far exceeding stock market gains on an outlook many see as positive for U.S. banks going forward.

Look at the two charts below. The first shows total return performance between Jan. 1, 2016, and the day before the election—Nov. 7—for the SPDR Financials Sector Select (XLF), bank-focused SPDR S&P Bank ETF (KBE) and the SPDR S&P 500 (SPY). SPY outperforms by about 1 percentage point: 

 

 

And below, this is what this year-to-date chart looked like on Nov. 11, three days after the vote. Financials are no longer underperformers, and KBE is now up twice as much as SPY: 

 

Charts courtesy of StockCharts.com

 

Financial Deregulation Forecast

The simple reason for this spike in performance rests on expectations. Trump is expected to promote deregulation in this sector, with one of the Obama regulations on the line being the Dodd-Frank Act.

Trump should also be good for higher rates. He has pledged to increase fiscal spending, which will ultimately translate into an uptick in inflation and higher rates. Since Election Day, 10-year Treasury yields have staged their most dramatic rally in some three years, racing above 2.10%, and hitting levels not seen since January.

This type of environment is a double-whammy of good news for financial institutions, particularly those that have struggled to generate much a profit in a long era of compressed interest rates.

"Financial ETFs are on fire, but the center of the heat is really banks, which will benefit from rising rates more than other areas of the financials sector," Eric Balchunas, ETF Analyst for Bloomberg Intelligence, told ETF.com.

 

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