Financials flows have been decidedly bearish in the options markets for the past week or so, and with today’s gap down in XLF (SPDR Financials Select Sector, Expense Ratio0.18%) below $20 a share, many of these positions are now firmly in the money.
XLF has been a notable out-performer YTD, but relative strength has been waning significantly in the past month or so with top components BRK.B, WFC, and JPM all taking it on the chin lately (today included).
Indeed, financial names have been staggering as of late, with a 2% gap down today in XLF, driven largely by weakness in large Money Center banks like JPM (8.33% weighting in XLF), WFC (8.48% weighting), and C (6.09% weighting) for instance.
XLF is heavily dominated by Financial Services names (86.27% of the portfolio) while Real Estate names make up 12.88% of the underlying index and has a decidedly mega to large cap slant (48.45% mega cap, 41/60% large cap).
We have mentioned the presence of fall put buyers in the past week or so via our options recaps and the price pressure in the space in recent days may be cause for alarm among those long holders of the ETF whom have been riding its relative out-performance to the broad market year to date.
Leveraged Inverse funds like FAZ (Direxion Daily Financial Bear 3X Shares, Expense Ratio 0.95%) and SKF (ProShares UltraShort Financials, Expense Ratio 0.95%) will likely catch a bid here as they are trading near multi-month highs and on the verge of a technical breakout.
If the recent under-performance in XLF continues for several weeks here, we may very well see portfolio managers making re-balance trades related to either specific tax situations if not re-adjusting their exposure to Financials in general since there are a bevy of Financials based equity ETFs on the marketplace, not all with the same exposure as XLF.
XLF remains the largest by a mile in terms of assets under management ($15.3 billion), and other funds in the space to note that may see a pick-up in activity in the near term include KBE (SPDR KBW Bank, Expense Ratio 0.35%), KRE (SPDR KBW Regional Banking, Expense Ratio 0.35%), VFH (Vanguard Financials Index, Expense Ratio 0.19%), IYF (iShares U.S. Financial Sector, Expense Ratio 0.48%), IYG (iShares U.S. Financial Services, Expense Ratio 0.48%), IAT
(iShares U.S. Regional Banks, Expense Ratio 0.48%), and FXO (First Trust Financial AlphaDEX, Expense Ratio 0.70%) to name a few.
With thirty eight Financials based long equity ETPs in on the marketplace at the moment, the recent shakeup in XLF will undoubtedly provide opportunities for institutional managers to consider re-shuffling their ETF holdings going into year’s end.
For more information on Street One ETF research and ETF trade execution/liquidity services, contact Paul Weisbruch at pweisbruch@streetonefinancial.com.
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