Sharp declines recently in U.S. large-cap banks such as Bank of America (NYSE: BAC) and Morgan Stanley (NYSE: MS) are weighing on financial exchange traded funds as the embattled sector lags the overall market.
“It’s not a secret that financials as a group have been underperforming the rest of the market for years. And sure, the S&P 500 has put together a tremendous rally since 2009 without the leadership from the banks. But it is very difficult for the market to keep going higher if financials are making new lows and dragging everyone else with them,” said J.C. Parets at All Star Charts.
The chart below shows the price ratio of a financial sector ETF against the S&P 500. The sector has underperformed the broader market this month and the ratio is testing the October low.
The $4.7 billion Financial Select Sector SPDR (NYSEArca: XLF) is down 7.2% over the past month, doubling the loss of the S&P 500. The financial sector ETF is off 22.8% year to date, compared with a 3.4% decline for the S&P 500, according to investment researcher Morningstar.
“For the S&P 500 to rally, it doesn’t necessarily need financials to lead, the market just needs the banks to stop going down. Stability more than anything else,” Parets said.
The financial ETF lost 2.5% on Monday on worries over banks’ exposure to Europe’s debt crisis and fallout from the “supercommittee” budget failure.
Bank of America has been warned it could face an enforcement action if regulators aren’t convinced the company has done enough to strengthen its financial position, The Wall Street Journal reported Tuesday.