The Smartest Bank ETF to Own if the Fed Hikes Rates This Year
Key Points
Big bank stocks have performed well over the past year as inflation and geopolitical risks have risen.
Banks can benefit in the current environment as the rates on loans begin to drift higher.
The Invesco KBW Bank ETF offers the best way to play a rate-hiking cycle with its focus on big banks.
- 10 stocks we like better than Invesco Exchange-Traded Fund Trust II - Invesco Kbw Bank ETF ›
If the Federal Reserve hikes rates this year, bank stocks could be the one sector that really benefits. Most investors might choose the State Street Financials Select Sector SPDR ETF (NYSEMKT: XLF) to add exposure. I believe the Invesco KBW Bank ETF (NASDAQ: KBWB) is the better exchange-traded fund (ETF) to buy.
The U.S. inflation rate hit 3.8% in April, the highest annualized reading since May 2023. Brent crude oil prices are up more than 60% year to date. Oil is back below $100 a barrel for now, but any further geopolitical tensions could send it back to triple-digits. December rate hike odds have climbed to roughly 50% as expectations for cuts have essentially disappeared.
Will AI create the world's first trillionaire? Our team just released a report on the one little-known company, called an "Indispensable Monopoly" providing the critical technology Nvidia and Intel both need. Continue »
This inflation cycle is unusual. Because inflation is concentrated mostly in the energy sector, rate hikes may or may not lower inflation rates. They may end up just slowing the economy.
But they do widen the spread between what banks earn on loans and what they pay on deposits. That margin expansion can happen whether rate hikes cool inflation or not. Right now, gross domestic product (GDP) remains positive and corporate earnings growth is strong. That means the economy can absorb a hike or two without significant damage.
That creates a positive setup for bank stocks.
Image source: Getty Images.
KBWB vs. XLF: Investing in banks versus financials
When investors want financials exposure ahead of a rate hike, most go with a broad financial sector ETF. That'll give you exposure to the entire sector, not just banking.
The State Street Financials Select Sector SPDR ETF can invest in financial services, insurance, capital markets, consumer finance, and even mortgage real estate investment trusts (REITs) in addition to banks. Banks, in fact, only account for about 27% of the fund. Its top holding, Berkshire Hathaway, is a conglomerate whose earnings have no connection to spreads. Another big holding, Visa, gets its revenue from spending volumes, not interest rates. The exposure is very different.
The Invesco KBW Bank ETF tracks a concentrated portfolio of 24 U.S. bank stocks, including JPMorgan Chase, Bank of America, Wells Fargo, and Goldman Sachs. These companies borrow short and lend long. That means the spread between those rates widens when the Fed hikes. And that leads to greater revenue.
KBWB: Top holdings and the rate hike case
| Company | Allocation |
|---|---|
| Morgan Stanley | 9.1% |
| Goldman Sachs | 8.7% |
| Bank of America | 7.8% |
| JPMorgan Chase | 7.7% |
| Wells Fargo | 7.1% |
| State Street | 4.5% |
| Bank of New York Mellon | 4.4% |
| Citigroup | 4.3% |
| PNC Financial | 3.9% |
| U.S. Bancorp | 3.8% |
Data source: Invesco.
Over the past year, this ETF has produced a total return of 37%. That beats the 30% return of the Vanguard S&P 500 ETF and the 5% return of XLF.
Perhaps not surprisingly, the start of the outperformance correlated almost exactly with the "Liberation Day" tariff announcements in 2025. At that point, rate cuts began slowly getting priced out and the markets began to anticipate higher-for-longer rates. That trend accelerated with the Iran war earlier this year, and bank stocks began outperforming again.
Energy-driven inflation doesn't respond to rate hikes in the way that demand-pull inflation does. If geopolitical tensions remain elevated, the Fed could hike and find oil prices have barely moved. In theory, there's a ceiling on how far any near-term rate-hiking cycle can go before the slower-growth dynamic outweighs efforts to lower prices.
But banks can still take advantage of any expansion in the deposit-to-lending spread.
The Invesco KBW Bank ETF is a good way to play a potential rate-hike cycle, especially if those hikes dampen the growth prospects of other areas of the economy. Concentration in the big banks is what makes this fund appealing, as it doesn't necessarily get watered down by the financial services companies that are less exposed to interest rates.
Should you buy stock in Invesco Exchange-Traded Fund Trust II - Invesco Kbw Bank ETF right now?
Before you buy stock in Invesco Exchange-Traded Fund Trust II - Invesco Kbw Bank ETF, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Invesco Exchange-Traded Fund Trust II - Invesco Kbw Bank ETF wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you’d have $471,072!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $1,303,352!*
Now, it’s worth noting Stock Advisor’s total average return is 983% — a market-crushing outperformance compared to 210% for the S&P 500. Don't miss the latest top 10 list, available with Stock Advisor, and join an investing community built by individual investors for individual investors.
See the 10 stocks »
*Stock Advisor returns as of May 28, 2026.
Bank of America is an advertising partner of Motley Fool Money. Citigroup is an advertising partner of Motley Fool Money. JPMorgan Chase is an advertising partner of Motley Fool Money. Wells Fargo is an advertising partner of Motley Fool Money. David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Goldman Sachs Group, JPMorgan Chase, U.S. Bancorp, Vanguard S&P 500 ETF, and Visa. The Motley Fool has a disclosure policy.
Recommended Articles
