Top Bank Stocks and ETFs to Capitalize on Upcoming Fed Rate Cuts

The Federal Reserve’s anticipated rate cuts in 2025 are reshaping the financial sector landscape, creating opportunities for investors to capitalize on the ripple effects of lower borrowing costs. With the FOMC projecting a median federal funds rate of 3.9% by year-end 2025 and 3.4% for 2026, the central bank’s pivot toward accommodative policy is expected to ease pressure on financial institutions while boosting loan demand and deposit cost efficiency [2]. This shift, however, is not uniform across all banks. Regional banks, in particular, stand to benefit disproportionately due to their reliance on traditional lending and deposit-taking models, which thrive in a lower-rate environment.

How Lower Rates Catalyze Growth in Financials

Lower interest rates directly improve the net interest margins (NIMs) of banks by reducing the cost of funding. For regional banks, which often face higher deposit costs and limited diversification, rate cuts can alleviate margin compression. For example, the cost of interest-bearing deposits for some banks remained elevated at 3.15% as of mid-2024, but with rate cuts in 2025, these expenses are expected to moderate, easing financial pressure [4]. Additionally, a steeper yield curve—where long-term rates rise relative to short-term rates—supports banks’ core business models by widening the spread between lending and deposit rates [3].

However, the benefits extend beyond NIMs. Reduced rates also stimulate loan demand, particularly for mortgages, small business loans, and consumer credit. This dynamic is critical for regional banks, which derive a significant portion of revenue from local lending. J.P. Morgan Research notes that the next rate cut is likely to occur in September 2025, with three additional 25-basis-point cuts expected by early 2026, potentially driving the policy rate to 3.25–3.5% [5].

Top Bank Stocks and ETFs to Watch

Regional Banks

1. U.S. Bancorp (USB): A leader in digital transformation and commercial banking, USB is well-positioned to capitalize on lower rates by expanding its fee-based services and optimizing its deposit base [1].
2. Truist Financial Corporation (TFC): TFC’s focus on cost discipline and regional market expertise makes it a strong contender as rate cuts reduce its funding costs and boost loan origination [1].
3. The Bank of New York Mellon Corporation (BK): BK’s asset servicing and wealth management divisions could see increased demand as lower rates spur investment activity and capital inflows [6].
4. Northern Trust Corporation (NTRS): With a strong global custody business, NTRS benefits from reduced interest costs and a potential rebound in asset management fees as markets stabilize [1].

Financial Sector ETFs

• iShares U.S. Regional Banks (IAT): This ETF offers broad exposure to regional banks, including USB and TFC, making it an efficient way to bet on the sector’s recovery [6].
• Financial Select Sector SPDR Fund (XLF): A broader ETF that includes large-cap banks and diversified financial services firms, XLF captures both regional and global players poised to benefit from rate cuts [6].

Risks and Considerations

While lower rates present opportunities, they also introduce challenges. Regional banks with significant exposure to commercial real estate (CRE) loans face heightened risk during periods of economic uncertainty [1]. Additionally, margin compression remains a concern if rate cuts outpace the ability of banks to adjust lending rates. Investors should monitor credit quality and balance sheet resilience, particularly for smaller institutions.

Conclusion

The Fed’s rate-cutting cycle in 2025 is a tailwind for financials, particularly regional banks that stand to gain from reduced deposit costs and improved lending conditions. While risks persist, the sector’s structural adjustments—such as digital transformation and fee-based revenue diversification—position it to navigate the transition. For investors, a mix of individual stocks and ETFs offers a balanced approach to capitalize on this pivotal shift in monetary policy.

Source:
[1] The Fed - June 18, 2025: FOMC Projections materials, accessible version [https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20250618.htm]
[2] When is the next Fed interest rate decision? [https://equalsmoney.com/economic-calendar/events/fed-interest-rate-decision]
[3] Eleventh District banks rely on core business, stay [https://www.dallasfed.org/research/swe/2025/swe2510]
[4] 2025 banking and capital markets outlook [https://www.deloitte.com/us/en/insights/industry/financial-services/financial-services-industry-outlooks/banking-industry-outlook.html]
[5] What's The Fed's Next Move? | J.P. Morgan Research [https://www.jpmorgan.com/insights/global-research/economy/fed-rate-cuts]
[6] Financial Stocks Should Pay Off in 2025 [https://www.kiplinger.com/investing/financial-stocks-should-pay-off-in-2025]