Key Points
At its June meeting, the Federal Open Market Committee (FOMC) signaled a notable shift in its economic outlook and interest-rate projections.
According to the June Summary of Economic Projections, the median forecast now points to at least one rate hike in 2026. This marks a reversal from March, when the median projection indicated a rate cut for that year. The dot plots for December and September 2025 had similarly signaled a single rate cut in 2026.
Most participants, however, also pointed to scenarios in which, in the context of stable labor market conditions, inflation would remain elevated due to strong [artificial intelligence] AI-related demand, the conflict in the Middle East, or the effects of tariffs. In such scenarios, almost all of these participants indicated that some policy firming would likely be warranted to return inflation to 2%.
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“Firming” is another term for raising rates. While a rate hike is not guaranteed, it is firmly on the table. Should the Federal Reserve move to increase rates later this year, one exchange-traded fund (ETF) stands out as a primary beneficiary.
Higher Rates Benefit Large Banks
Higher interest rates are generally viewed as a headwind for growth and small-cap stocks, as increased borrowing costs can constrain expansion. Conversely, lenders—particularly large super-regional and national banks—tend to benefit. When rates rise, these institutions can charge more for loans, boosting net interest income, a core revenue driver.
Large banks hold a distinct advantage: they can often maintain deposit rates near current levels thanks to their extensive service offerings and perceived stability. Most customers are unlikely to switch banks for marginally higher deposit yields. The risk emerges only if rates rise too far, too fast—as seen in 2022 and 2023—dampening loan demand. However, the current economic backdrop suggests a measured, one-off increase with rates projected to stabilize or decline over the next few years, creating a favorable environment for major banks.
Load Up on This Bank ETF
Given these dynamics, the Invesco KBW Bank ETF (NASDAQ: KBWB) presents a compelling option. The fund tracks the KBW Nasdaq Bank Index, which comprises the 26 largest U.S. banks—precisely the institutions poised to gain the most from a single rate hike.
Its top three holdings are Bank of America, JPMorgan Chase, and Wells Fargo.
The ETF has returned 11% year to date (15% with dividends reinvested) and offers a 12-month yield distribution rate of 1.97%. Over the past year, its total return stands at 33%, while its five- and 10-year average annual total returns are 12% and 14.4%, respectively.
