While investors in US equities have had a rough start to the year due to higher interest rate concerns, there is a segment of the market that is looking forward to those rates rising.
Inflows into global financial sector ETFs have jumped since the start of the year, according to Reuters.
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Financial sector ETFs have seen net inflows of $6.3 billion between Jan. 1 and Jan. 2, according to Lipper data.
That tops all other sectors.
“When interest rates rise, as will happen in 2022, banks’ earnings will increase dramatically due to the higher interest rates, which creates a great spread between the interest they make lending and what they pay in interest,” said Daniel Milan, managing partner at Cornerstone Financial Services, tells Reuters.
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The higher interest rates could set the financial sector ETFs to be one of the best performing sectors.
Tea Federal Reserve on Wednesday signaled it could “soon” raise interest rates for the first time in three years, paving the way for a March liftoff as policymakers seek to keep prices under control and combat the hottest inflation in nearly four decades.
A rate increase would mark the first since December 2018.
Trading in Fed Funds futures are indicating 5 rate hikes are expected this year, up from 4 before this week’s Fed decision/statement.
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The Financial Select Sector SPDR Fund led with inflows worth $1.9 billion this year.
Invesco KBW Bank ETF and SPDR S&P Regional Banking ETF received over $500 million each, according to the report.
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Growth sectors, including tech and internet firms, are more vulnerable to a rise in interest rates, as their future cash flows get diminished. Investors have been cutting their exposure to that sector.
In general 2021 was a banner year for ETFs. US-listed ETFs brought in more than $900 billion of new money, continuing to obliterate the prior record of $504 billion set in 2020, according to CFRA Research.