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Forget Fed cuts. Traders bet big on bank-focused ETF

As investors focus on a better growth outlook and earnings season, an ETF tracking banks is riding high despite the Federal Reserve’s rate cutting path.

The Financial Select Sector SPDR Fund (XLF) is on track for its best month of inflows since April, garnering close to $1.2 billion in October. It marks a second straight month of cash pouring into the $24.3 billion fund, data compiled by Bloomberg show.

Some firms are promising to absorb external research costs for clients while others have registered as MiFID-compliant venues called systematic internalizers.

With expectations for global growth expected to pick up in the wake of apparent progress in trade negotiations between the U.S. and China as well as Brexit, investor appetite for cyclical plays, including financials, has returned. U.S. economic data has come in better than feared and signs are piling up that the American consumer remains strong. It’s adding to investor confidence that banks are a good bet going forward even as the Fed slashes interest rates, which tends to eat into their net-interest margins.

“Banks are going to be moving along with the broader economy,” Tony Bedikian, head of global markets at Citizens Bank in Boston, said in a phone interview. “We’ve got record low unemployment, the job market is very strong, the consumer continues to be very strong, company balance sheets in general are quite healthy.”

The expense ratios for these funds were closer to that of the average actively managed equity mutual fund.
September 12

Better-than-expected earnings results from some of the biggest U.S. lenders also helped lift sentiment. Revenue at the six largest banks climbed from a year earlier for the 12th time in the past 13 quarters, helped by gains in trading and a jump in investment banking. The top four lenders posted their fifth straight quarter of record revenue from businesses serving households. And Morgan Stanley, for instance, beat on net revenue, equities trading revenue, investment banking and earnings per share.

Though the financials sector was among the worst-performing through September this year, it is now besting the S&P 500 by 0.4 percentage points, gaining 2.3% in October.

Bloomberg News