After the surprise election of Donald Trump, stocks have been on fire. This is the exact opposite reaction as most investors expected.
The logic goes something like this. Trump looks poised to spend billions on infrastructure as well as cutting taxes across the board. He’s also prepared to allow U.S. corporations to bring trapped overseas earnings back home at a 10% tax rate, while passing various initiatives to force companies to keep jobs in the United States.
In short, such moves would lead to big deficits, which would then lead to inflation. In such an environment, U.S. banks would do quite well.
Banks operate on something called net interest margins, which is the difference between the rate borrowed at and the rate charged to customers. As rates go higher, net interest margins expand.
Higher inflation leads to higher rates, which leads to more profitable banks. It’s little wonder why U.S. banks have been some of the best performing stocks since Trump was elected.
Canadian investors can get exposure to the sector by investing in the BMO Equal Weight U.S. Bank ETF (TSX:ZBK), which is up more than 17% this year, primarily from the strength over the last week.
The ETF has investments in 16 different U.S. banks, all with a weighting between 6% and 7.6%. Keycorp is the largest holding, while Wells Fargo is the smallest. The ETF charges a reasonable management fee of 0.39%, and it has nearly $600 million in assets. It also pays a 1.6% dividend.
