Just noticed something interesting happening with banking stocks heading into late Q2 2026 – turns out last year's banking sector performance was absolutely stellar, hitting profit levels we haven't seen in over a decade. That kind of momentum tends to stick around, and it's making me think more carefully about how to play this sector.

So here's what drove that surge: Banks managed their deposit costs really well despite all those Fed rate cuts, which kept their net interest margins solid. Credit quality stayed surprisingly healthy – loan defaults stayed low, which helped the bottom line. Plus you had this wave of M&A activity and trading volatility that pumped up non-interest income across the board. It's the kind of perfect storm that doesn't happen every year.

Now, a lot of people are asking me whether banking is still a play for 2026. Honestly, I think the answer is yes, but with a twist. The easy gains from regulatory tailwinds and onshoring are already priced in. What we're looking at now is more sustainable – AI productivity improvements, steadier credit conditions, stronger capital positions. The growth pace might cool from last year's spike, but healthy margins should persist.

Here's the thing though: If you're trying to get exposure without betting the farm on a single bank's credit quality or management risk, banking ETFs are starting to look pretty compelling. You get the whole industry's margin potential without the single-stock volatility.

I've been watching a few of these funds pretty closely. The First Trust NASDAQ Bank ETF (FTXO) holds 49 banking companies and had that 21.6% run last year – top holdings are Citigroup, Wells Fargo, and Bank of America. The State Street SPDR S&P Bank ETF (KBE) is broader with 102 holdings across different banking segments, charged 35 basis points, and hit 15.4% YTD last year. Then there's the Invesco KBW Bank ETF (KBWB) – this one's more concentrated with 26 holdings heavy on the investment banking side, featuring Goldman Sachs and Morgan Stanley. That one actually rallied hardest at 31.4% last year.

The beauty of banking ETFs for portfolio construction is they let you capture the sector's overall profit potential while spreading the risk. Whether it's the mega-cap investment banks or the regional players, you're getting diversified exposure to the whole ecosystem. For anyone building a 2026 portfolio, this feels like a reasonable way to stay engaged with what's still shaping up to be a solid banking year.