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Banking ETFs to Consider as Big Banks Boost Dividends

Big banks are raising dividends, amid news that the June U.S. consumer confidence data hit its highest level since the coronavirus pandemic began. Banks have also passed their stress tests, heightening expectations for robust economic growth in Q2.

While many of the biggest banking stocks are flat to lower on Tuesday, after popping higher in the prior session, the news of increasing consumer confidence has propelled the broader stock market higher once again.

The SPDR Dow Jones Industrial Average ETF (DIA), SPDR S&P 500 ETF Trust (SPY), and Invesco QQQ Trust (QQQ) are all green just after 12:30 PM EST.

While analysts are optimistic about the consumer confidence data and its effect on stocks, investors are anxiously awaiting another big market mover, the nonfarm payroll report on Friday, which could predict potential changes from the Federal Reserve.

“The economy is booming, the stock market is climbing so it makes perfect sense to me that consumer confidence numbers are through the roof,” said Mike Zigmont, head of trading and research at Harvest Volatility Management in New York.

“Consumers’ assessment of current conditions improved again, suggesting economic growth has strengthened further in Q2,” said Lynn Franco, senior director of economic indicators at The Conference Board.

Meanwhile, bank shares soared on Monday, after last week’s stress tests by the central bank, where all major 23 banks passed. Shares of Morgan Stanley surged 4% yesterday, after the bank said it will double its quarterly dividend, and engage in a $12 billion stock repurchase program.

The major banks are raising their dividends and broadening their stock-buyback programs after the results of the latest round of Federal Reserve stress tests allowed for a removal of pandemic restrictions on returns of capital. According to Goldman Sachs analysts, the new dividends and spending on buybacks are 11% and 22% higher than anticipated, respectively.

The results have key banks like Morgan Stanley, JPMorgan Chase, and Wells Fargo increasing their quarterly dividend payments by a minimum of 11%.

The aforementioned was good news for the SPDR S&P Bank ETF (NYSEArca: KBE) as the fund rallied by as much as 1% Tuesday.

A widening of the spread between yields on short-term and longer-dated Treasury debt is also helping to propel stocks higher as well. The 10-year Treasury yield climbed to 1.5% from 1.47%, while the 2-year yield stayed at the 0.25% level. Since banks depend on the spread for borrowing and lending, a widening gap between short-term and longer-term rates helps profitability.

The news on returns of capital in the form of dividends and buybacks could fuel additional gains. “We believe that this level of dividend yield could drive increased investment interest from certain income-oriented mutual funds,” Goldman Sachs analyst Richard Ramsden said in a research note.

For investors looking for banking ETFs to play amid the news, there are several options. One such choice is the iShares U.S. Regional Banks ETF (IAT).

IAT seeks to track the investment results of the Dow Jones U.S. Select Regional Banks Index. The fund generally invests at least 90% of its assets in securities of the index and in depositary receipts representing securities of the index.

The underlying index measures the performance of the regional bank sector of the U.S. equity market, and is a subset of the Dow Jones U.S. Bank Index. The fund is up over 30% as the U.S. economy continues to rebound, which could result in higher interest rates.

Investors can snag broad financials exposure with the iShares U.S. Financials ETF (IYF). The fund seeks to track the investment results of the Dow Jones U.S. Financials Capped Index, which is made up of U.S. equities in the financial sector.

The fund generally invests at least 90% of its assets in securities of the underlying index and in depositary receipts representing securities of the underlying index

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