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Worst-Ever Drought for Bank ETF Breaks Ahead of Fed Meeting

Worst-Ever Drought for Bank ETF Breaks Ahead of Fed Meeting

  • SPDR S&P Bank ETF sees inflows for first time in two months
  • Fed meeting, technical levels in focus for financials ETFs
Fed's Dovish Tilt Most Felt on `Belly of the Curve': JPMorgan

A near two-month dry spell for one of the largest banking exchange-traded funds has officially come to an end.

The $2.3 billion SPDR S&P Bank ETF, ticker KBE, hadn’t seen a single day of inflows since January, but that changed Friday when investors deposited $38 million into the fund. The signs of life come after the ETF experienced its worst month on record in February. State Street’s broader sector fund, the Financial Select Sector SPDR Fund, ticker XLF, also caught a bid with its second largest weekly inflow this year.

The sudden investor interest comes ahead of this week’s Federal Open Market Committee meeting, in which the Federal Reserve’s so-called dot plot, plans for its balance sheet and economic projections will be in the spotlight. Bank and financials ETFs at large are also wrestling with a potential breakout of their 200-day moving averages.

“Traders/investors are starting to look at the banks as (possibly) the next group that could catch,” said Christian Fromhertz, chief executive officer of Tribeca Trade Group. “I personally do not own any, but they are now on my radar.”

For Julian Emanuel, BTIG’s chief equity and derivatives strategist, a surge in financials stocks is key for his year-end S&P 500 target of 3,000 to materialize. With the Fed now willing to overshoot its inflation target in the U.S. and bond yields overseas poised to rise, that should help the yield curve steepen from current levels, which is typically a positive signal for banks, he said.

“Higher 10-year yields, particularly if accompanied by a steeper yield curve, supports the case for financials (BTIG overweight),” Emanuel wrote to clients last week. “‘Firming financials’ could be expected to outperform given that ‘rumors of inflation’s demise’ have been greatly exaggerated.”

— With assistance by Vildana Hajric