The Financial Select Sector SPDR Fund (NYSEARCA:XLF) has risen by 4 percent over the last five days as investors bet on Fed decision making. On Wednesday Janet Yellen revealed that the central bank decided to raise its rate target by 0.25 percent. Shares in the Financial Select Sector SPDR Fund were set to open lower on Thursday morning as traders pondered their next move.
Generally interest rate rises are considered to be a good thing for financial earnings. Higher base rates give firms more leeway to work on their margins. At time of writing shares in the fund were trading at $24.50. That’s flat from the close on Wednesday afternoon.
Looking at interest rate impact
The Fed interest rate hike was signaled very well in recent weeks. That means that the number was already priced in to most of the instruments on the market. The 4 percent rise in the Financial Select Sector SPDR Fund shows that traders probably saw some risk of reneging. Now that the new rate target is locked in, traders will decide what’s next on the horizon.
One of the big movements will likely come down to President Donald J. Trump. The country’s chief executive is bogged down in an obstruction of justice investigation right now. That means his promise of rolling back Obama, and older, banking regulations is in danger.
Traders of the Financial Select Sector SPDR Fund (NYSEARCA:XLF) reckon that repealing regulations will make banks more profitable. If the investigation into Donald Trump puts his agenda in danger, traders may flee.
If traders are betting on political risk through the Financial Select Sector SPDR Fund (NYSEARCA:XLF) they may be in for a fall. Markets are not normally the best at judging movements in politics. On top of that Robert Mueller’s inquiry is a black box. News any day could move the dial in favor of, or against, President Trump.
Betting on the Financial Select Sector SPDR Fund
The Financial Select Sector SPDR Fund is an ETF that represents the stocks of America’s financial firms. It includes huge investment banks like JPMorgan Chase & Co. as well as diversified industrials like Berkshire Hathaway Inc. and credit card companies like American Express Co. It’s designed to give investors exposure to the wider American financial system.
ETFs like the Financial Select Sector SPDR Fund (NYSEARCA:XLF) are more popular than ever as the market treats financial as more homogeneous instruments. Moves in the sector focus on big industry wide changes rather than momentum on an individual stock level. The ETF is the most highly traded on Wall Street, and there may even be some systemic risk to the system as a result of its size.
“If ETFs begin to trade at higher volumes than their underlyings, even though it’s not a systemic market risk, it will make it more expensive.” Thats the opinion of Eric Balchunas, ETF analyst for Bloomberg Intelligence.
As the interest rate pressure slowly peels off, for the time being at least, we may see some movement away from cross market ETFs and toward traders focusing on individual stocks. If, instead, investors get trapped in the Trump Trade 2.0 there’s no certainty on what could happen.