If you've been watching banking stocks this year, you've probably noticed something: they're crushing it. America's largest banks are heading into the end of 2025 with historic stock prices, beefier balance sheets, and a regulatory environment that's suddenly a lot friendlier. And if you're an ETF investor with exposure to financials, you're likely feeling pretty good about that.

Bank stocks have been outperforming the broader market in a big way. The KBW Bank Index (BKX), which tracks the country's largest lenders, is up 30% year to date—comfortably ahead of the S&P 500 Index. Meanwhile, JPMorgan Chase & Co (JPM), Bank of America Corp (BAC), and Wells Fargo & Co (WFC) have all hit record levels. Even Citigroup Inc (C) managed to exceed its book value for the first time in seven years, which is no small feat.

Wells Fargo analyst Mike Mayo put it simply: there's more upside than he expected coming into the year, and the large banks are likely to keep outperforming in 2026.

Banking ETFs Are Riding the Wave

For ETF investors, this surge has translated into strong performance across funds heavily weighted toward big lenders. The Financial Select Sector SPDR ETF (XLF), Invesco KBW Bank ETF (KBWB), and SPDR S&P Bank ETF (KBE) have all rallied between 14% and 30% this year.

What's interesting is that the performance isn't just about interest rate speculation anymore. Instead, it's increasingly driven by actual earnings growth and a resurgence in dealmaking activity. Banks are making money the old-fashioned way—by doing deals.

Wall Street's Dealmaking Machine Is Humming Again

Capital markets activity is back in a serious way. According to Dealogic, global investment banking volumes are on track to increase 10% year-over-year, marking the highest level since 2021. That's a big deal, especially after the quiet years that followed.

Sure, there were some tariff-related hiccups earlier in the year, and the U.S. government shutdown delayed a few IPOs. But analysts are still forecasting that trading revenues for JPMorgan, Bank of America, Citigroup, Goldman Sachs Group Inc (GS), and Morgan Stanley (MS) will reach record levels in 2025. Net income for the group is also expected to hit an all-time high.

At a conference organized by Goldman Sachs, Citigroup CFO Mark Mason struck an optimistic tone, noting that capital markets are "wide open to some extent" because global economies need to grow regardless of uncertainties. That's banker-speak for "we're busy and we're making money."

Deregulation Is Freeing Up Serious Capital

Here's where things get really interesting for bank ETFs: deregulation is changing the game. Goldman Sachs analysts estimate that American banks will have between $180 billion and $200 billion in excess capital to deploy by year's end, thanks to deregulatory policies adopted during the Trump administration.

That's not pocket change. Banks are expected to funnel this capital into stock buybacks, technology investments, and an uptick in mergers and acquisitions. For ETF portfolios loaded with bank stocks, that's excellent news.

Banks Are Setting Ambitious Profit Targets

The major banks aren't just sitting on their hands, either. They're laying out some pretty ambitious profitability goals. Bank of America is targeting a return on tangible common equity (ROTCE) of 16% to 18%. Wells Fargo, finally free from the regulatory shackles tied to its 2016 fake accounts scandal, is aiming for 17% to 18%. And JPMorgan plans to invest an additional $10 billion in 2026 to expand credit cards and branches, boost employee compensation, and ramp up AI initiatives.

These aren't survival targets—these are growth targets. That's a significant shift from the post-financial crisis mentality that dominated the sector for years.

What It All Means for Your ETF Portfolio

For fund managers and ETF investors, this represents a fundamental shift. Bank ETFs aren't just interest-rate-sensitive value plays anymore. They're increasingly tied to capital markets activity, M&A, and genuine business expansion.

Goldman Sachs analyst Richard Ramsden summed it up well: "If you want the economy to grow faster, somebody needs to finance it."

With banks operating under lighter regulatory constraints and once again pursuing expansion strategies, ETFs focused on financials may be entering a new cycle. This isn't about banks limping along and managing risk—it's about banks actively deploying capital and chasing growth. And if the momentum continues into 2026, banking ETFs could have a lot more room to run.