Financial ETFs and Markets Have a Headache This Big

More woes are hitting the financial sector, and the related exchange traded funds (ETFs) are reflecting the pain in early trading today.

Merrill Lynch (MER) issued a report this morning that U.S. banks are in "capitulation mode" and are likely to trade below their fair value as the concerns and writedowns that have been plaguing the sector all year continue, Tenzin Pema for Reuters reports.

Large regional banks are expected to be "exceptionally weak" in the second quarter, and Merrill Lynch said Bank of America (BAC) and Wachovia (WB) were likely to miss estimates by the biggest percentage.

Further adding to anxiety about the financial sector is Washington Mutual’s (WM) announcement of 1,200 job cuts, and Moody’s downgrade of two bond insurers: MBIA (MBI) and Ambac Financial Group (ABK).

The market is down overall so far today, as are financial ETFs, including:

• Regional Bank HOLDRs (RKH): down 25.6% year-to-date; Wachovia is 10.1%
• Financial Select Sector SPDR (XLF): down 21.5% year-to-date; Bank of America is 7.8%; Wachovia is 2.6%
• iShares Dow Jones US Financial Services (IYG): down 23.6% year-to-date; Bank of America is 10.5%; Wachovia is 3.2%