While still strengthening along with the broader markets, financial sector exchange traded funds face headwinds.
Year-to-date, the Financial Select Sector SPDR (NYSEArca: XLF) rose 4.8%, Vanguard Financials ETF (NYSEArca: VFH) increased 5.1% and he iShares U.S. Financials ETF (NYSEArca: IYF) gained 4.5%. [Financials ETFs Could Continue Languishing]
The Federal Reserve’s annual stress test on the largest banks in the U.S. revealed that some of the largest lenders face a lack of robustness, writes Robert Goldsborough for Morningstar.
The sector still has to muddle through increased compliance, regulatory and legal costs due to stricter rules following the financial crisis.
Additionally, the slow expansion in the U.S. economy has raised concerns about banks, which typically withhold lending in a weaker economic environment.
Consequently, Morningstar analysts currently view the financial sector as fairly valued. Nevertheless, the sector could rebound if the economy improves. A healthier economy would allow the Federal Reserve to cut back on easy money policies and raise rates, which would likely go with greater lending from banks.