Custody Banks Like State Street and BNY Mellon Are Quietly Near Record Highs. Here's What's Driving the Rally.
Yahoo Finance ·
Banks have rallied during the past few months, lifting the KBW Nasdaq Bank Index , which tracks the largest U.S. bank stocks, more than 12% so far this year. But there is one often overlooked sector of the banking industry that has outperformed considerably: custody banks. These are not like traditional banks that lend to consumers and businesses. They hold and service huge amounts of institutional assets -- such as mutual funds, pensions, exchange-traded funds (ETFs), stocks and other investments, real estate, cash, hedge funds, endowments, and 401(k)s -- all from large institutions. They collect fees on these assets for servicing and holding them -- and those fees rise as the asset totals increase. In addition, custody banks hold clients' uninvested cash and pay a low deposit rate. But they aggregate cash and reinvest it in liquid, higher-yielding short-term instruments, profiting off the difference.
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