Few sector exchange traded funds were hoping for the Federal Reserve to raise interest rates last week the way financial services funds were. Financial services ETFs, such as the Financial Services Select Sector SPDR (NYSEArca: XLF), the largest financial services ETF, were believed to be prime beneficiaries of the Fed’s exit from its zero interest rate policy, an exit that has yet to take place.
Until last month, data suggested traders had been betting the Fed will boost borrowing costs at its September meeting, but some rate-sensitive asset classes say otherwise. Actually, Treasury yields say otherwise and 10-year yields now reside at multi-month lows, somewhat crimping ETFs tracking sectors positively correlated to rising rates, such as financial services funds. [What These ETFs Say About Rates]
One point of attraction for XLF and rival financial services ETFs has been the discounted valuations of big bank stocks. However, the cheapness of U.S. banks belies the strength of the financial sector. Over few years, banks have shed unprofitable businesses and assets while bulking up capital to return some to shareholders through stock buybacks and dividends, the Wall Street Journal reports.
Now, XLF and other financial services ETFs are facing technical weakness after the Fed once again declined to increase borrowing costs. Through July, XLF was climbing, but that changed last month “when price collapsed and bearish (liquidation) volume surged to new highs… as price erased all the gains of 2015 and more in just three sessions. A logical retracement catapulted price into the underside of the falling 20 day EMA (Green) which is a target to play for on a retracement swing,” according to Afraid To Trade.