De-Stress Your Portfolio By Betting On Bank ETFs

Things have lately started to fall in place for the financial sector.U.S. banking giants passed the Dodd-Frank Act supervisory stress test 2017 with flying colors last week. All 34 bank holding companies cleared the first round of test, reaffirming their strength to endure severe economic crisis (read: Will Trump & Fed Make 2017 a Year of Financials ETFs?).

Shareholder Value Maximization Reward

The Fed subsequently okayed plans from the 34 largest U.S. banks to deploy additional capital in stock buybacks, dividends and other purposes for the first time since the financial crisis. On June 28, the Fed indicated that banks like “JPMorgan Chase & Co and Bank of America Corp (NYSE:BAC), had passed the second, tougher part of its annual stress test.” The banks offered such stable financials that the Fed approved initiatives like shareholder value maximization.

Overall, banks that cleared the stress tests can now pay out 100% of their projected net income over the next four quarters, against 65% seen after last year’s results, according to a Fed official noted by Reuters. The news agency also pointed out that Citigroup received an approval of returning nearly 125% of projected earnings over the next four quarters.

Fed Rate Hikes

If this was not enough, the Fed is on a policy tightening mode having enacted two rate hikes this year already. Fed chief Yellen also recently made it clear that the Fed’s gradual policy tightening and reduction of its $4.5 trillion balance sheet will remain on course. As of now, we are likely to see one more hike this year (read: Hawkish Yellen, Draghi Boost These ETF Areas).

Wall Street Reaction

The yield on the 10-year Treasury note was 2.22% on June 28, the highest since the Fed meeting in mid-June. Since banking stocks are likely to benefit from a rising rate environment, the sector surged on June 28. The key financial ETF Financial Select Sector SPDR ETF (NYSE:XLF) XLF added over 1.5% on the day while it advanced over another 1.5% after hours. The S&P 500 logged the best one-day gain since late April buoyed the financial sector.

JPMorgan (NYSE:JPM) ’s shares rose over 2% on the day while it added about 1.9% after hours.Citigroup’s (NYSE:C) shares gained about 1.5% and jumped about 2.6% after hours. Wells Fargo (NYSE:WFC) shares gained about 2.2% while it notched 1.7% higher after hours. Goldman Sachs (NYSE:GS) advanced about 1.3%.

Financial ETFs to Buy

Overall, the banks look good as does the financial sector at large. For an ETF approach, one can add any of the financial funds mentioned below for a diversified exposure to the sector. Investors can take a look at PowerShares KBW Bank ETF KBWB) (up about 1.7% on June 28), SPDR S&P Bank (MX:KBE) ETF KBE (up about 1.5%) and Vanguard Financials ETF VFH (up about 1.5%) (see all Financials ETFs).

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