In the current market, investors are turning bullish on the financial sector. The Dow Jones U.S. Financials Index has added 22.94% over the past year, significantly outperforming the S&P 500 Index, which has gained 11.39%.

The likelihood of the Fed cutting interest rates, along with signs of regulatory easing, has shifted investor sentiment in favor of the financial sector.

Unpacking the Optimistic Outlook

According to Jay Woods, chief global strategist at Freedom Capital Markets, as quoted on Axios, the Fed may be on track to ease interest rates sooner than what investors had expected, potentially lowering capital costs for banks.

Additionally, easing regulatory pressure appears to support the forecast. Per Woods, a potential deal between Bank of New York Mellon and Northern Trust can be a significant bullish factor for the sector.

According to Axios, technical indicators suggest that the financial sector is primed for a recovery, following the tech sector’s lead.

Regulatory Breakthrough

According to Yahoo Finance, in a major move signaling a broader deregulatory shift, U.S. regulators proposed one of the most significant rollbacks of bank capital rules since the 2008 financial crisis. The proposal targets the enhanced supplementary leverage ratio (eSLR), which requires the largest U.S. banks to hold additional capital, based solely on their size.

Under the new plan, that requirement would be reduced by 1.4 percentage points, from the current eSLR of 5%, which the largest U.S. banks, such as JPMorgan Chase JPM, Goldman Sachs Group GS and Morgan Stanley MS, are supposed to maintain.

The aim is to make it easier for these institutions to lend more freely and increase demand for U.S. Treasuries, with additional regulatory changes for major banks on the horizon. According to TD analyst Jaret Seiberg, as quoted on Yahoo Finance, the proposed change is expected to have a broadly positive impact on major U.S. lenders.

ETFs to Explore

Below, we highlight funds for investors to increase exposure to the U.S. financial sector. These funds have performed better than the SPDR S&P 500 ETF SPY over the past year, which has gained 13.41% but have underperformed over the past month, when SPY has added 6.28%.

Financial Select Sector SPDR Fund (XLF)

Financial Select Sector SPDR Fund seeks to track the performance of the Financial Select Sector Index with a basket of 73 securities. The fund has amassed an asset base of $48.29 billion and charges an annual fee of 0.08%.

XLF has Zacks ETF Rank #1 (Strong Buy) and has a dividend yield of 1.41%. The fund has a one-month average trading volume of about 35.98 million shares.