Consider This Bank ETF Before The Fed Cuts Rate This Fall

Key Points

• The financials sector has posted a YTD gain of 9.04%, outperforming the overall market’s gain of 8.42%.
• The likelihood of the Federal Reserve easing its benchmark interest rate in September or October is bullish for banks.
• The Invesco KBW Bank ETF (KBWB) is up more than 14% in 2025 and could finish the year even stronger. 

The Federal Reserve’s July FOMC meeting came and passed precisely as expected: without any change to its benchmark effective federal funds rate (EFFR).

Chairman Jerome Powell and the other Fed governors noted their post-meeting press release that the central bank will be holding its EFFR steady in the 4.25% to 4.50% range, noting that “uncertainty about the economic outlook remains elevated.”

The financials sector sold off on the news despite the announcement being largely anticipated by economists and Wall Street alike. The Financial Select Sector SPDR Fund NYSEARCA: XLF dropped 100 basis points in the wake of Powell’s speech. The fund was able to recover half of that loss before the market closed, showing the hallmark resilience financials have exhibited all year. 

So far in 2025, the financials sector is up more than 9%, outpacing the broad S&P 500 and trailing only communication services (9.62%), utilities (12.58%), technology (13.58%), and industrials (15.93%). While those gains have slowed over the past quarter, the macro environment remains ripe for the investment firms, lenders, real estate brokers, insurance companies, and, importantly, the banks that call that sector home.

For investors looking to gain exposure before the Fed’s next FOMC meeting—and an expected rate cut—the Invesco KBW Bank ETF NASDAQ: KBWB could fill that void in portfolios.   

Keep an Eye on the Fed’s Next Meeting 

The Fed doesn’t meet again until September, but policymakers will gather in August for the annual Jackson Hole Economic Policy Symposium to discuss inflation, labor, and other key indicators.

When the FOMC reconvenes from Sept. 16–17, there is an 82–83% probability of a rate cut, according to the CME FedWatch Tool. This number is up sharply from about 38% just before the July jobs report was released on Aug. 1, which indicated only 73,000 jobs added and upward revisions subtracting over 258,000 jobs from May and June.

Looking forward to the October FOMC meeting, the likelihood of the central bank easing the EFFR stands at about 85%. 

So, barring a catastrophic rise in inflation or a black swan event that results in catastrophic job losses, the Fed’s objectively successful job in maintaining its dual mandate of price stability and maximum employment could manifest in lower interest rates by late summer or early fall. That is now even more likely given the weakening labor data, and would be extremely bullish for an already-resilient financials sector.

When the Fed cuts interest rates, it encourages businesses and consumers to borrow more money, in essence, fueling the economy. Beyond loan originations increasing, the refinancing of existing debt becomes more fashionable, with borrowers—specifically in the corporate space—more willing to take on debt as lower rates increase their return on investment by reducing the upfront costs of capital. 

Invesco’s Bank ETF Has Outperformed the Financials Sector

Bank stocks have performed notably well this year.

Many household names have posted strong gains with Bank of America NYSE: BAC at 8.29%, Morgan Stanley NYSE: MS at16.16%, Wells Fargo & Co. NYSE: WFC at 16.51%, JPMorgan Chase & Co. NYSE: JPM at 24.85%, and Goldman Sachs Group NYSE: GS at 27.09%.

Together, those five banks account for 39.69% of the holdings in the Invesco KBW Bank ETF. Add in Citigroup NYSE: C and Capital One Financial NYSE: COF—which are up 36.99% and 20.44%, respectively, in 2025—and you have the banking industry’s equivalent of the Magnificent Seven making up nearly 48% of the KBWB portfolio. 

So it’s no surprise that the ETF has not only outpaced the broad S&P 500 this year, but it has also outpaced the financials sector. Those gains are, of course, rear-facing. But when taking into account the smart money’s stance on the Invesco KBW Bank ETF, the future looks equally promising. 

Institutional Ownership Is Up, Short Interest Is Down 

Over the past 12 months, KBWB has seen institutional buyers outnumber institutional sellers 149 to 74. That has resulted in $1.32 billion in institutional inflows versus just $308.04 million in institutional outflows.

Put another way: The smart money has pumped 124.31% more money into the Invesco KBW Bank ETF than it has taken out over the past year.

Meanwhile, the shorts are strikingly absent. KBWB currently has a short interest of 4.74 million shares, which represents roughly 7.2% of its float. That marks a 3.46% decrease over the previous month, when 4.91 million shares were shorted. 

Positioning Smartly for a Fed Rate Cut Pivot

KBWB is naturally interest-rate sensitive and has historically reacted to both rate moves and banking sector dynamics. For investors who are on the fence, keep in mind that KBWB has a relatively low expense ratio of 0.35% and a 2.15% dividend yield ($1.60 annually per share), making it a potentially efficient way to position for potential Fed easing. If you anticipate a rate cut in September 2025, bank stocks are likely to benefit—especially those in KBWB.

It's important to remember that the ETF has both upside potential and downside risk, depending on evolving macroeconomic conditions. Investors should pay attention to inflation data, labor metrics, CME FedWatch probabilities, and key Federal Reserve communications—especially those from Jackson Hole and the September FOMC meeting—as they will signal how aggressively the Fed may move on monetary policy in the coming months.