The market’s largest financial stocks such as Citigroup (NYSE: C) and Bank of America (NYSE: BAC) have weighed heavily on the overall market as measured by the S&P 500. However, it’s a different story in smaller stocks where the financial sector is holding its own or even boosting performance, an analyst said Monday.
PowerShares S&P SmallCap Financials (NasdaqGM: PSCF) was down 2.4% so far in 2011 as of June 10, but rose 14.8% over the trailing year, according to Morningstar. The exchange traded fund tracks the financial stocks in the S&P SmallCap 600 Index.
Meanwhile, Financial Select Sector SPDR Fund (NYSEArca: XLF) was off 6.8% year to date and up 3.6% over the previous 12 months. The ETF is a subset of the S&P 500.
“The dramatic underperformance of the financial sector is a convenient touchstone to explain the ills of the broader market as the second quarter winds down this month, but this is really only true for the large caps,” says Nicholas Colas, chief market strategist at ConvergEx.
In the S&P 500, financial stocks have “absolutely and dramatically” underperformed since April 1, down 9.8% versus 4.4% for the entire index, Colas write in a note to subscribers Monday.
“Move down the capitalization spectrum, however, and the story changes,” he wrote. Among S&P SmallCap 600 stocks, financials are in line with the index’s return and are actually providing a slight lift in the S&P MidCap 400 Index.
Financial stocks and banks in particular have fallen on signs the economic recovery is running out of gas.
“With the recent spate of economic data pointing to prolonged weakness in an already tepid recovery, positive catalysts for the banks sector appear distant,” Sterne Agee analysts said in a recent report. “The headwinds continue to mount for the group as housing values remain under pressure, demand for credit remains weak, and the growth outlook for the sector is subdued at this point.” [Financial ETFs Down]
Financial stocks have hurt the U.S. large-cap category because the poor-performing sector has represented a large slice of the S&P 500 at between 15% and 20% over the past decade.
“The S&P 500 has all the too-big-to-fail banks in its basket,” Colas remarked. “The small and mid cap indices have none, even if other parts of those baskets face their own problems. If the financial sector remains under pressure, small and mid cap indices look to have better constituents in the financial sector. But if you want to play the contrarian, the S&P 500 seems the best choice.”
Bank of America and Citigroup shares are down nearly 20% year to date. [Investors Look for Bounce in Bank ETFs]
PowerShares S&P SmallCap Financials
