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Financial stocks are basking in a post-election rally after Donald Trump's election win as investors anticipate a friendlier regulatory landscape for banks, brokers and consumer finance companies.

With expectations of deregulation and possible tax cuts, traders are piling into financials at levels not seen in years.

The Financials Select Sector SPDR Fund jumped over 5% last week, hitting fresh record highs, while weekly inflows surged to $1.573 billion—the highest in over two years.

Regional banks, in particular, were on fire, with the SPDR S&P Regional Banking ETF skyrocketing nearly 11% and seeing $1.09 billion in inflows, marking its largest influx of money since March 2023.

Key Drivers: Deregulation, Tax Cuts Fuel Investor Optimism

Investors are betting on a wave of Trump-favored financial reforms that could benefit the sector.

Richard Ramsden, a Goldman Sachs analyst, highlighted that "the market is pricing in the potential for changes to a number of proposed regulations, a step up in capital markets activity, as well as the potential for a reduction in the corporate tax rate."

Potential regulatory changes under Trump could include:

• 401K Reform: Opening up retirement plans to private investments could attract a flood of new capital.
• Relaxed Antitrust Regulations: A more lenient antitrust stance may spark increased mergers and acquisitions (M&A) activity.
• Reduced SEC Oversight: There is limited clarity on whether the SEC will continue probing brokers' sweep pricing practices.
• Crypto-Friendly Policies: Financial firms with crypto exposure may benefit from a more favorable regulatory environment and higher digital asset prices.

Goldman Sachs's Top Picks Among Financials Stocks

In anticipation of these shifts, Ramsden and his team have identified several top picks across the financial sector.

Here's where they see the biggest potential gains:

• Large Banks: Citigroup Inc. , JPMorgan Chase & Co. , and Wells Fargo & Co. .
• Consumer Finance: Bread Financial Holdings , Synchrony Financial , and Capital One Financial Corp. .
• Capital Markets: Blackstone Inc. , Apollo Global Management Inc. , KKR & Co. Inc. , LPL Financial Holdings , Tradeweb Markets Inc. , Evercore Inc. , and PJT Partners Inc. .

Steeper Yield Curve Expected to Boost Regional Banks

As markets react to potential economic stimulus and reduced regulatory pressure, analysts anticipate a steeper yield curve, which could be a windfall for banks with heavy exposure to fixed-rate assets.

Around 60% of both regional and large banks' balance sheets consist of fixed-rate holdings, positioning them to profit as long-term rates rise.

Ramsden's picks for banks that stand to gain the most from a steeper yield curve include:

Regional Banks:

• Citizens Financial Group Inc.
• Comerica Inc.
• First Hawaiian Inc.
• Zions Bancorporation
• Truist Financial Corp.
• Huntington Bancshares Inc.
• Regions Financial Corp.
• PNC Financial Services Group Inc.
• Ally Financial Inc. .

Surge in Capital Velocity: M&A and Trading Boost Expected

Trump's pro-business stance is also expected to accelerate capital velocity in the M&A and equity capital markets, providing a strong backdrop for trading activity.

According to Ramsden, large banks like Morgan Stanley could be the biggest beneficiaries, while among regional banks, KeyCorp and Citizens Financial Group Inc. stand out.

Investment banks could also see a boost, with Jefferies Financial Group Inc. , Moelis & Co. , PJT Partners Inc. , and Piper Sandler Companies positioned to capitalize on a more active M&A market.

In the alternative asset management space, Carlyle Group Inc. , KKR, Apollo, TPG Inc. , and Ares Management Corp. are expected to benefit from an uptick in private equity deal flow.

Tax Cut Hopes Could Supercharge Regional Banks

Financial stocks are uniquely positioned to benefit from any corporate tax reductions, given that 90% of their earnings come from the U.S. and are currently taxed at an average rate of 23%. After the 2017 tax reform slashed the corporate tax rate from 35% to 21%, financials saw their effective tax rate drop by 10 percentage points.

Ramsden estimates that if the Trump administration pursues another tax cut, regional banks would likely see the most significant upside.

His top tax-cut beneficiaries include Moelis & Co. , American Express Co. , Evercore Inc., Bread Financial Holdings, Piper Sandler, First Citizens BancShares Inc. , Synovus Financial Corp. , and Western Alliance Bancorporation .

Insurers to Benefit from Steeper Curve, P&C Pricing Power

The insurance sector may also stand to gain under Trump's pro-business policies. Ramsden expects potential increases in claim costs but sees positive momentum for property and casualty pricing.

Insurers with substantial U.S. exposure and a favorable position on the yield curve could see tailwinds.

Ramsden's picks in the insurance space include W.R. Berkley Corp. , Hartford Financial Services Group Inc. , and The Travelers Companies Inc. , which he believes are better positioned than brokers to benefit from these trends.

Read Next:

• EXCLUSIVE: Trump Victory Triggers ‘Reshoring’ Rally As Supply Chain Security Outweighs Cost

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© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

The Vanguard Small-Cap Value ETF (VBR) was launched on 01/26/2004, and is a passively managed exchange traded fund designed to offer broad exposure to the Small Cap Value segment of the US equity market.

The fund is sponsored by Vanguard. It has amassed assets over $32.46 billion, making it the largest ETFs attempting to match the Small Cap Value segment of the US equity market.

Why Small Cap Value

Sitting at a market capitalization below $2 billion, small cap companies tend to be high-potential stocks compared to its large and mid cap counterparts, but come with higher risk.

While value stocks have lower than average price-to-earnings and price-to-book ratios, they also have lower than average sales and earnings growth rates. When you look at long-term performance, value stocks have outperformed growth stocks in nearly all markets. But in strong bull markets, growth stocks are more likely to be winners.

Costs

When considering an ETF's total return, expense ratios are an important factor, and cheaper funds can significantly outperform their more expensive counterparts in the long term if all other factors remain equal.

Annual operating expenses for this ETF are 0.07%, making it one of the least expensive products in the space.

It has a 12-month trailing dividend yield of 1.88%.

Sector Exposure and Top Holdings

ETFs offer a diversified exposure and thus minimize single stock risk but it is still important to delve into a fund's holdings before investing. Most ETFs are very transparent products and many disclose their holdings on a daily basis.

This ETF has heaviest allocation to the Financials sector--about 22.50% of the portfolio. Industrials and Consumer Discretionary round out the top three.

Looking at individual holdings, Slcmt1142 accounts for about 0.74% of total assets, followed by Smurfit Westrock Plc (SW) and First Citizens Bancshares Inc/nc (FCNCA).

Performance and Risk

VBR seeks to match the performance of the CRSP U.S. Small Cap Value Index before fees and expenses. The CRSP U.S. Small Cap Value Index measures the investment return of small-capitalization value stocks.

The ETF has added roughly 19.18% so far this year and was up about 37.86% in the last one year (as of 11/11/2024). In the past 52-week period, it has traded between $155.95 and $211.66.

The ETF has a beta of 1.13 and standard deviation of 20.30% for the trailing three-year period, making it a medium risk choice in the space. With about 853 holdings, it effectively diversifies company-specific risk.

Alternatives

Vanguard Small-Cap Value ETF holds a Zacks ETF Rank of 2 (Buy), which is based on expected asset class return, expense ratio, and momentum, among other factors. Because of this, VBR is an excellent option for investors seeking exposure to the Style Box - Small Cap Value segment of the market. There are other additional ETFs in the space that investors could consider as well.

The iShares Russell 2000 Value ETF (IWN) and the Avantis U.S. Small Cap Value ETF (AVUV) track a similar index. While iShares Russell 2000 Value ETF has $13.43 billion in assets, Avantis U.S. Small Cap Value ETF has $15.13 billion. IWN has an expense ratio of 0.24% and AVUV charges 0.25%.

Bottom-Line

Passively managed ETFs are becoming increasingly popular with institutional as well as retail investors due to their low cost, transparency, flexibility and tax efficiency. They are excellent vehicles for long term investors.

To learn more about this product and other ETFs, screen for products that match your investment objectives and read articles on latest developments in the ETF investing universe, please visit Zacks ETF Center.

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