Bank ETFs Pressured by Rates, Loans

October 26th at 3:26pm by Tom Lydon

Unlike the major U.S. stock indexes, exchange traded funds benchmarked to banks and financial stocks haven’t broken out of their recent trading range.

Now, banks have an interesting problem: they have too much cash, according to a report.

Investors fearful of Europe’s debt crisis and volatility in the stock market are staying on the sidelines in cash.

But some banks may not want it, report Eric Dash and Nelson D. Schwartz for The NY Times.

For instance, Bank of new York Mellon has warned some clients who were moving large sums of cash in and out of accounts that they will incur a 0.13% fee, according to the report. Some smaller community banks are no longer strapped for cash either. [Investors Bet on Bank ETFs After 40% Decline]

Currently, bankers lack sound investment opportunities. The banks say they have enough deposits but find no “quality borrowers” to lend to in this fragile economy. Additionally, the Fed’s decision to set rates close to zero translates to banks earning less interest on deposits loaned, the NY Times reported.

Consumer sentiment is also worsening. The New York-based Conference Board’s household sentiment index dipped to a lower-than-expected 39.8 in October, the lowest level since the March 2009, according to a Bloomberg report. Additionally, property values are down 3.8% from 2010, according to S&P/Case-Shiller.

“The outlook continues to deteriorate,” Yelena Shulyatyeva, a U.S. economist at BNP Paribas, said. “It’s not good for confidence when people see their main asset, their homes, decline in value. Our best-case scenario is we’ll muddle through.”

SPDR KBW Bank ETF (NYSEArca: KBE) and Financial Select Sector SPDR (NYSEArca: XLF) are among the largest financial sector ETFs.

SPDR KBW Bank ETF

Max Chen contributed to this article.

For more information on the financial sector, visit our financial category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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