An ETF for Capital Markets

Focus: FINANCIALS

Carla Pasternak Image Carla Pasternak Editor, The Income Investor

Earnings for banks and bank-related firms are generally favorably affected by higher rates.

That's because their net interest margins (NII)—the difference between long-term investment income and short-term funding costs—generally increase if long-term rates rise more than short-term rates.

So, as the Federal Reserve hikes rates, analysts are raising 2017 earnings estimates for these money managers.  
Proposed corporate tax reforms are another potential positive for the capital markets sector.

To profit from the favorable backdrop for capital markets, you can invest in individual stocks or and exchange-traded fund, the SPDR S&P Capital Markets ETF (KCE), which carries a better than 2% yield.

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The ETF tracks the returns of the S&P Capital Markets Select Industry Index. About 80% of its $100 million portfolio of 55 holdings is divvied up between asset managers and  investment banks & brokerages, with the remaining allocated to financial exchanges.

Top holdings include investment brokerage TD Ameritrade (AMTD) and asset managers Northern Trust (NTRS), and Waddell & Reed Financial (WDR).

Over the past year, the fund has gained 44% (versus 18% for the S&P 500) and, in the last three months the shares have rocketed with 9% total returns, almost triple the broad-based index.

Technically, a sustained breakout above the $50 level would be highly bullish, indicating that the shares have completed a basing formation dating from June 2015.

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