The financial sector, and thus the exchange traded funds that invest in this sector, has been the big winners in the stock market after Donald Trump surprisingly emerged victorious in the US presidential election in November. The sector was then further boosted by the Federal Reserve in December chose to raise interest rates.

The ETFs that invest in regional banks, till exempel SPDR S&P Regional Banking ETF (NYSEArca: Kria), have benefited greatly from this. since the 1 January 2016 this exchange traded fund has risen by more than 34 percent, measured in USD. For a Swedish investors had value growth has been even higher as the dollar rate had been working for an investor who bought US stocks or funds.

With a steepening of the yield curve, or the greater the difference between short- and long-term government bonds, banks can achieve improved net interest margins that improved profitability because they borrow money in the short term and lend them in the long term. Fed continues to raise rates as many hope this can support bank shares. The Federal Reserve has already indicated that there may be as many as three interest rate hikes in 2017.

Rally in bank shares

Since the US elections in November, the bank shares, especially smaller banks, experienced a rally course and S&P Regional Bank Index during this period of 25 percentage. The prospect of higher interest rates and a more lax regulation for Trump has led many investors assessed that bank profits are poised to continue rising. This is an important catalyst for investing in fine sector, whether it is the issue of direct investments in stocks or ETFs, likelihood of positive earnings growth has increased.

Higher interest rates provide higher profits for banks

Higher interest rates would help to increase the difference between what banks charge on their loans granted and what they pay on customer deposits, which would increase the performance of the financial sector. Regional banks are most positively correlated to rising interest rates because higher prices improves their interest margins. It looks favorable for the banks' profits during 2017, but the recent rally in bank shares may reflect investors' belief of better times. It may simply be that the future benefits already priced into the banks' share prices. Thus, we can probably expect some profit-taking in the sector. Since the election results in the United States announced KRE has seen inflows of nearly 300 MUSD.

Bank shares sensitive to political moves

Political moves could increase the value of bank shares more. Donald Trump har sagt att han avser att låta sitt team arbeta med att avveckla den lag som kallas för Dodd-Frank Act som undertecknades av president Barack Obama under 2010 i syfte att minska riskerna för en framtida finanskris. Lagen gör att bankerna tvingas ta högre kostnader för att undvika en finanskris. Dodd-Frank Act har också tvingat många av bankerna till att minska sin exponering mot mer riskfyllda tillgångar, det vill säga de har slutat att låna ut pengar till projekt med högre risk, något som också haft en negativ påverkan på den nedersta raden i resultaträkningen hos många av företagen inom finanssektorn.