As the Federal Reserve appears set for its first interest rate hike in nine years, it is not surprising that financial services stocks and exchange-traded funds are garnering increased attention. Over the past three months, it is hard to find a bank-heavy ETF that has not easily outpaced the S&P 500.
The $513.4 million PowerShares KBW Bank Portfolio ETF (NYSE:KBWB) is one such fund. Seasoned bank investors undoubtedly have heard of the KBW Nasdaq Bank Index, which is underlying index for KBWB. While rival financial services ETFs have posted three-month gains of over 6 percent, KBWB can lay claim to a 90-day gain of 7.3 percent, making it one of the best-performing financial services ETFs over that stretch.
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Banking ETFs And The Fed
With increasingly higher odds that interest rates are going to imminently rise, market participants have a somewhat clear playbook for the days ahead. Looking for the exchange-traded funds that merit attention and scrutiny in the weeks ahead is not difficult because many of the funds below are, for better or worse, highly sensitive to interest rates.
Bank stocks have been among the biggest beneficiaries of interest rate prognosticating. Since Fed Chair Janet Yellen testified in front of Congress in early November and left open the door for a rate hike, bank stocks have generally outperformed. Between November 3 and November 11, the PowerShares KBW Bank Portfolio has outpaced the S&P 500 Index by 4.13 percent, according to a recent PowerShares note.
A Closer Look AT KBWB
Four stocks Bank of America Corp (NYSE:BAC), Dow component JPMorgan Chase & Co. (NYSE:JPM), U.S. Bancorp (NYSE:USB) and Citigroup Inc (NYSE:C) combine for roughly a third of KBWB's weight.
Although U.S. banks posted boffo third-quarter profits, expectations are in place that a Fed rate hike will further boost banks' profitability.
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Historically, bank stocks have often displayed a positive correlation to interest rates. As the Fed begins to normalize monetary policy, higher interest rates could feed through to increased bank profitability. The Taylor Rule uses targeted inflation and unemployment numbers to gauge the equilibrium level of the fed funds rate. Right now, the Taylor Rule argues for a fed funds rate of just below 3.00 percent. This compares with a current targeted fed funds rate of 0.12 percent. Clearly, the Taylor Rule indicates there is plenty of room for the Fed to boost interest rates, added PowerShares.
Investors have certainly warmed to KBWB as the notion of higher interest rates has gained steam. The ETF has added $241.1 million of its $513.4 million in assets under management, ranking it seventh among PowerShares ETFs for year-to-date inflows.
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