Position Yourself for the Coming Boom

Vaccine deployment is ramping up, and people are looking to return to their everyday lives. We’re looking at a potential economic boom. And with the right investments, it could be a boom time for investors, too.

By March 23, over 45 million Americans were fully vaccinated. According to Bloomberg, more Americans have received their first doses than the total number that tested positive for COVID-19 since the pandemic started.

Over 128 million vaccine doses have been administered to date, and the U.S. is averaging 2.5 million additional doses per day. If we continue the current pace, 75% of the American population will be vaccinated by the end of August.

No longer confined to their homes, eager consumers will be looking to spend. Lockdowns and stay-at-home orders have kept people saving, and all of that pent-up demand will flow into the economy.

As consumers spend all at once, prices will increase, and we’ll see inflation.

Inflation is usually accompanied by higher interest rates. We’ve already seen Treasury yields rise. The 10-year surged to over 1.7% on March 19. That was its highest level since last January.

The easiest way to play this trend is to add banking exposure.

The financial services industry and big banks are in a position to capitalize on higher interest rates through margin expansion.

Banks widen the spread between the interest they pay on deposits and the rates they can obtain with Treasuries when interest rates are higher. It’s easier to sneak in higher fees, too.

Add in the impacts of businesses returning to full capacity and banks will be able to decrease their loan loss provisions. When less people and businesses are defaulting on their loans, banks don’t have to write off those losses.

Both of these factors positively impact earnings, and we should see the big banks as the most prominent winners as we return to normal.

Here are two financial services exchange-traded funds (ETFs) that are positioned to benefit from the economy reopening and a bond fund that offers additional protection against unchecked inflation …

Pick 1. Financial Select Sector SPDR Fund (NYSEARCA: XLF)

XLF tracks financial stocks in the S&P 500 and weighs them by their market capitalization size. This ETF focuses solely on the biggest banks and excludes smaller-cap financials not included in the S&P 500.

Among XLF’s top holdings are Berkshire Hathaway Inc. Class B (NYSE: BRK.B) and the largest banks. Rounding out the top three in addition to Warren Buffett’s massive holding company are JPMorgan Chase & Co. (NYSE: JPM) and Bank of America Corp. (NYSE: BAC). XLF has an expense ratio of 0.12% and $37.5 billion in managed assets.

XLF’s chart shows that bank stocks have been trending upwards due to expectations of the economy reopening and rising interest rates. The fund pulled back last week, but it looks like it still has plenty of room to run.


 

Pick 2. SPDR S&P Bank ETF (NYSEARCA: KBE)

This ETF tracks an index of U.S. banks, and it targets investing in at least 80% of its assets in the banking industry. KBE rebalances each of its holdings quarterly to equal weightings, meaning it does not favor the largest banks with its position sizing.

KBE has a more targeted exposure to banks than its peer funds, with 85.68% of its assets in the banking sector. Currently, the fund’s top three holdings are Signature Bank (NASDAQ: SBNY), SVB Financial Group (NASDAQ: SIVB) and Sterling Bancorp (NYSE: STL). KBE’s expense ratio is 0.35%, and the fund manages $3.8 billion in assets.

This ETF has performed similarly to XLF, but the key difference between the funds is their weighting. KBE’s equal weighting of all fund holdings after rebalancing captures more of the performance from the smaller and mid-sized banks.


 

Pick 3. iShares TIPS Bond ETF (NYSEARCA: TIP).

TIP is a bond fund that holds inflation-protected U.S. Treasuries that have maturity dates farther than one year out. If we see hyperinflation caused by excessive money printing, this is one of the safest investment vehicles for safeguarding value. TIP has an expense ratio of 0.19% and $25.85 billion in assets under management.

Looking at the chart below, you can see that bond yields have risen significantly in the last week due to greater concerns of inflation and interest rate increases. If Treasury yields continue rising, this fund will keep trending upwards.


 

Both of the financial services ETFs are set to benefit from the return to normal business operations and the impacts it will have on the economy, while inflation-protected Treasuries guard against a worst-case hyperinflation scenario.

All three are worth keeping an eye on as the year progresses.

All the best,

Sean

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