Banking ETFs Skyrocket as Industry Recovers

Financials ETFs, which include banks and other financial services companies, are beating out all other sectors for the highest inflows this year as the banking industry recovers from a tumultuous crisis that unfolded in March. 

This year alone, financials exchange-traded funds have seen $4.8 billion in flows, beating out every other sector by far, including technology, which saw just $220 million deposited into the sector, according to data from Bloomberg. 

The Financial Select Sector SPDR Fund (XLF), which heavily weights big banks like JPMorgan Chase & Co. and Bank of America Corp., leads in inflows this year, with $3.5 billion. The SPDR S&P Regional Banking ETF (KRE) had $1.3 billion in inflows this year, with over $1 billion flowing in as the crisis unfolded. On March 15, the fund saw $1.1 billion in inflows. 

The interest is likely due to investors wanting to buy the sector’s recovery.  

“The broader industry became so dislocated because of fears of contagion spillover,” Matthew Bartolini, head of SPDR Americas Research at State Street Global Advisors, said in an interview. Some investors saw the ETFs as undervalued because of poor performance and were ready to capitalize on a “repair phase.”  

“Since then, a lot of contagion fears have been lessened,” he added. 

Regional Bank ETFs 

The inflows into banking ETFs can partially be credited to investors bargain hunting when the banking tumult unfolded. Bank stocks plummeted during the regional banking crisis in March, which was triggered by the collapse of venture-capital-focused Silicon Valley Bank. Investors saw low valuations as an attractive opportunity to buy into ETFs that largely had solid fundamentals but were down due to instability in the financial sector. 

Earnings have also played a huge role in boosting banking ETFs, both in terms of inflows and performance. “The sector that had the highest year-over-year growth in revenue is financials,” said Bartolini. He noted banks and consumer finance were both reporting double-digit year-over-year revenues.  

Even as banks continue to recover and mergers shore up smaller banks, investors like the diversification ETFs offer and see growth for the overall indexes even if a few bank stocks fall, according to Bartolini. 

Despite regional bank ETFs being down significantly year to date, they’ve contributed to the inflows for the sector at large. KRE, for example, is down 19% year to date even as it saw more than $1 billion in inflows. In the past month, the fund is up 18%, as investors see the sector set to recover.  

Interest rates rising can also benefit financial ETFs, as increased interest income and wealth management revenue can be a boon to banks. The Federal Reserve raised rates by 25 basis points at its meeting Wednesday.  

Contact Lucy Brewster at [email protected] or on Twitter at @lucyrbrewster