US Financial ETFs Really Like Trump

The beaten-down sector is now a star thanks to an outlook that promises deregulation and higher rates.

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.

KBE Trading More Than Oracle

"It's fascinating to see the regional bank ETF, KBE, trading more than Oracle stock as tuned-in investors go straight to the product showing the most sensitivity to the catalysts of rising rates and deregulation," he said.

KBE, with $2.6 billion in assets, tracks an equal-weighted index of U.S. banks. Names like Bank of America lead its holdings. The fund also includes small exposure to some investment management names and life insurance companies.

KBE is one of many bank-focused ETFs that include the SPDR S&P Regional Banking ETF (KRE), a $2.5 billion strategy that, like KBE, offers direct exposure to banks. However, the fund holds smaller, regional ones, like Citizens Financials Group and Fifth Third Bank.

Together, these U.S. bank-focused ETFs command about $6.2 billion in combined assets and have been gathering assets since the election. KBE and KRE alone have attracted a combined $240 million in net creations since Election Day. Consider that up to the day before the election, both ETFs were in the red, with net redemptions of some $650 million in 2016.

CLF Sees Flow Reversal

XLF, meanwhile, has also seen investor appetite change on the heels of a Trump win. The ETF has attracted net inflows of $2.5 billion in the three days since the election alone, adding to its $13.5 billion footprint.

That’s a dramatic reversal from what had been a tough year of outflows for the fund. Up until the day before the election, Nov. 7, XLF had bled a net of $3.8 billion in net redemptions in 2016—losses that were almost entirely recouped in the three days following the vote.

XLF is a market-cap-weighted portfolio of S&P 500 financial stocks. Banks represent about 40% of the portfolio holdings.

XLF is the largest U.S. financials ETF, but it’s only one among a diverse group of funds that’s riding this wave higher. That list also includes hugely popular strategies such as the Vanguard Financials Index Fund (VFH) and the iShares U.S. Financials ETF (IYF).

Contact Cinthia Murphy at [email protected]