Why has the SPDR Financial XLF ETF surged to a record high?

The Financial Select Sector SPDR ETF (XLF) has been in a strong bull run and is sitting at its all-time high as investors welcomed Donald Trump. The fund, which tracks the biggest companies in the financial services industry, has risen for five consecutive months, reaching a high of $49.55 on Wednesday.

The XLF ETF has jumped by 31% this year, slightly beating the S&P 500 and Nasdaq 100 indices. Similarly, the SPDR S&P Regional Banking (KRE) ETF has risen for two straight months and is hovering near the highest point since March 2022. 

Donald Trump victory

The XLF ETF jumped sharply after Donald Trump won the election, a move that will likely usher in a new era in the US.

A likely reason for this is that Trump has pledged to focus on deregulating key industries and cutting taxes more.

Most analysts believe overregulation has stifled growth in some industries, especially in the banking sector. This trend was most evident after the Global Financial Crisis (GFC) in 2008/9 when new regulations stifled banks’ operations. 

As a result, the private credit, often known as shadow banking, has grown and now controls trillions of dollars. Some of the top players in this industry are firms like Apollo Global Management, Blackstone, and Ares Capital. 

At the same time, banks will benefit from low taxes in the next few years. Trump has pledged to slash taxes more and ensure that his previous ones are renewed when they expire in the coming year. 

Still, there are potential risks that could affect the financial industry in the coming years. For one, Trump’s policies are estimated to push public debt up by over $7.5 trillion in the next few years. As a result, total debt will move from the current $35.9 trillion to over $42 trillion in the next few years. 

Soaring public debt means that the US could be at risk as we saw during the mini-budget crisis in the US when most financial assets plunged. 

The other risk is that Trump has pledged to slightly reduce the Federal Reserve’s independence, a move that could put the economy at risk. On the positive side, the US has guardrails in place to prevent these issues.

Federal Reserve interest rate ahead

The next important catalyst for the XLF ETF is the upcoming Federal Reserve interest rate decision scheduled on Thursday.

In it, analysts expect that the bank will continue to cut interest rates to cushion the economy from a hard landing.

The Fed has already delivered a jumbo rate cut this year, but analysts believe that it will move to 0.25% cuts going forward. 

American bond yields have jumped sharply ahead of the Fed decision. The 10-year yield rose 4.44%, while the 30-year and two-year jumped to 4.6% and 4.22%, respectively. That is a sign that they expect the Fed to be less dovish. 

Big banks benefit from low tax cuts in two main ways. First, top companies like Morgan Stanley and Goldman Sachs that have large investment banks will benefit from the potential of mergers and acquisitions (M&A) and initial public offerings.

Unlike Kamala Harris. Trump will appoint regulators who will be more open to consolidation of the US economy. Under Biden, the FTC has stopped numerous deals like Capri’s buyout by Tapestry and JetBlue’s buyout of Spirit Airlines.

Additionally, lower rates may bring back deposits from money market funds, a move that will lead to stronger earnings. 

Also, analysts expect that earnings growth will accelerate in the next few years, mirroring what happened during Trump’s first term.

XLF companies

For starters, the XLF ETF is made up of the biggest financial companies in the US. Berkshire Hathaway is the biggest constituent. Just last week, the company said that its cash balances jumped to over $325 billion. 

The other top names are JPMorgan, the biggest bank in the United States with trillions of dollars in assets under management. JPM is known for its strong performance and its fortress balance sheet. 

VISA is the third company in the XLF fund and is the biggest money processor in the world. Other big names are Mastercard, Bank of America, Wells Fargo, and S&P Global.

XLF ETF analysis

XLF chart by TradingView

The weekly chart shows that the XLF ETF has been in a strong bull run in the past few years. It has now soared by 207% from its lowest level in 2020. 

This week, the fund jumped above the key resistance level at $47.81, its previous all-time high and invalidated the double-top pattern. 

The fund has remained above the 50-week and 25-week moving averages. Therefore, the fund will likely continue rising as bulls target the key resistance level at $60. In the near term, however, there is a likelihood that it will pull back as the election hype eases.

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