A quiet M&A desk is a sorry sight for a banker and a lost opportunity for an investor. But that may be about to end. Citigroup has predicted a strong rebound in banking fees this quarter, fueled by increasing equity underwriting and M&A activity, reported Reuters. After a bleak spell of deal famine, the signs are for a fee feast, and ETF investors might do well to bring a plate.

Citi's forecast suggests mid-single-digit growth in banking fees in the second quarter, alongside a surge in trading revenues. While equities and fixed-income trading are already showing muscle, the advisory and underwriting sides of the business could be gearing up for a comeback.

And when Wall Street feasts, the financial ETFs don't stay hungry for long.

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M&A's Are Back On The Menu

Mergers and IPOs were shelved for most of 2023 and early 2024, courtesy of wild interest rates and recession anxiety. But with inflation cooling and the Fed suggesting a possible rate-cutting cycle, corporate confidence is coming back into play—laying the groundwork for increased deals.

“Given the amount of capital flowing through M&A—some $3.4 trillion in 2024—and the decades of research showing that programmatic acquirers create more value than peers, investing in M&A capabilities makes sense,” a February report by McKinsey & Company said.

“M&A continues to be super active — there’s a lot of dialog, a lot of engagement,” Citi said in its recent outlook, commenting on improved pipelines in equity capital markets and advisory services. If the momentum continues, fee-based revenue will climb sharply in top banks.

That directly affects ETFs that track financial institutions, especially those more exposed to advisory-heavy banks such as Goldman Sachs ( GS ) , JPMorgan ( JPM ) , and Morgan Stanley ( MS ) .

ETFs That Could Ride The Deal Wave

SPDR Select Sector Fund

Why it’s important: With heavy weightage to Citi, JPMorgan ( JPM ), Goldman Sachs ( GS ), and Bank of America, XLF is a front-line winner of increased banking fees. It’s one of the most liquid sector ETFs, too, ideal for active traders and institutions.

SPDR S&P Bank ETF

Why it matters: Provides equal-weight exposure to large and mid-cap banks. Though more interest-rate spread-sensitive, it would be helped if M&A activity comes to regional players or smaller institutions, which is possible in the current environment.

SPDR S&P Regional Banking ETF ( KRE )

Why it matters: If transactional activity filters down into regional consolidations, most notably in commercial banking, KRE might benefit from acquisition premiums and improved fee margins.

Bottom Line

The fat-fee, fancy-bonus era may not be here yet—but it’s around the corner. As banks prepare for a wave of deal-making and advisory activity, sector-specific ETFs can potentially provide a low-friction means of accessing the rebound.

And, if Wall Street’s having a fee feast this quarter, perhaps it’s time to take a fork and some judiciously selected tickers.

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