Time for Bank ETFs?

Bank-oriented exchange-traded funds (ETFs), including Invesco KBW Bank ETF KBWB, SPDR S&P Bank ETF KBE, First Trust Nasdaq Bank ETF FTXO and Themes Global Systemically Important Banks ETF GSIB, have been in great shape this year, having returned to the range of 8% to 10% gains. This is in contrast to the 2.8% gains noticed inSPDR S&P 500 ETF Trust SPY. Let’s find out what’s driving bank and financial ETFs higher this year.

Strong Bank Earnings

The fourth-quarter banking earnings season turned out positive, with major banks topping Wall Street expectations. Shares of the likes of JPMorgan Chase JPM, Goldman Sachs GS, Wells Fargo WFC and Citigroup C received a positive response right after releasing the earnings (read: ETFs to Play on Gaza Truce, Easing Inflation & Solid Bank Earnings).

Steepening of the Yield Curve

The U.S. treasury yield curve has been steepening lately thanks to the Fed rate cuts. The spread between the 10-year and 2-year U.S. treasury yields was as high as 39 bps on Jan. 13, 2025, versus the negative 38 bps spread noticed at the start of 2024. Although Trump tariff tensions have weighed on risk-on trade sentiments lately and long-term bond yields, the 10-year-2year yield spread was still a positive 20 bps as of Feb. 7, 2025.

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J.P. Morgan Provides Optimistic Outlook

Marianne Lake, JPMorgan Chase’s consumer chief, announced at a Goldman Sachs financial services conference in December (as quoted on Yahoo Finance) that the bank has raised its net interest income forecast for 2025 by $2 billion, reflecting an improved interest rate outlook. An improvement in investment banking and trading operations is also expected.

PNC’s Bullish Outlook

PNC Financial Services’ PNC CEO Bill Demchak also expressed confidence in the banking sector in December, describing the business environment as being "as bullish as anything I’ve ever seen." He noted "amped-up energy across corporate America" and expressed hope that it would carry into 2025, as quoted on Yahoo Finance.

A New Administration to Ease Regulations?

Bank executives anticipate that the Republican administration may relax regulations, including easing rules on corporate mergers that generate significant profits for Wall Street. They hope this leniency will boost lending and dealmaking activity.

Banks are also lobbying against proposed capital rules under Basel III, which would require them to hold greater buffers for future losses. While some regulators have signaled willingness to water down these requirements, the final outcome remains uncertain.

Any Wall of Worry?

Trump’s economic policies, including raising tariffs, lowering taxes and deporting undocumented immigrants, could raise inflation and lead the Fed to not take an extreme dovish stance in 2025. This may create some uncertainty for the banking sector. JPMorgan Chase’s Lake previously downplayed expectations of sweeping deregulation (read: Only One Rate Cut Expected in 2025? ETFs to Play).

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