After the tumbles seen for U.S. stocks last Friday and this Monday, just one S&P 500 sector, utilities, can say it is in the green on a year-to-date basis.
Perhaps, in the oddest of ways, it can be argued that financial services ETFs, some of last year’s darlings among sector funds, have not been too bad this year. Highlighting just how bad U.S. stocks have been to start 2014, the Financial Select Sector SPDR (NYSEArca: XLF) entered Tuesday with a 5.6% loss on the year, but that was enough to make XLF the fourth-best of the nine sector SPDRs this year. XLF is the largest sector ETF by assets. [Fun With Financials in 2014]
XLF is far from the only bank ETF offender in 2014. Rival funds such as the iShares U.S. Financials ETF (NYSEArca: IYF), Vanguard Financials ETF (NYSEArca: VFH) and the Fidelity MSCI Financials Index ETF (NYSEArca: FNCL) were all sporting losses north of 5% heading into the start of trading Tuesday.
In the near-term, the financial services sector’s price action may get worse before it gets better. The reason: February, the weakest month in the best six-month cycle for stocks, is usually unkind to bank stocks.
Since 1998 when it debuted, XLF has posted an average February loss of 2.4% and generated positive returns in the second month of the year just 46.7% of the time, according to Kensho. XLF sees the same odds in August and November with only June (40% chance of rising) being worse.
IYF and VFH are not immune to the February woes afflicting the financial services sector. Those ETFs have averaged negative returns in the second month of the year since debuting in 2000 and 2004, respectively, and their odds of success this month are comparable to XLF’s.
February lethargy for bank ETFs, of course, comes by of the funds’ components. Since 1990, Wells Fargo (NYSE: WFC) has lost an average of 0.4% in February. Goldman Sachs (NYSE: GS) has been twice as bad this month since 1999. Citigroup’s (NYSE: C) average February performance since 1990 is a loss of almost 2%. Those three stocks combine for almost 17% of XLF’s weight, according to State Street data.
In fairness, opportunities remain with XLF and friends. Financials are not expensive. If anything, the sector is downright cheap compared to consumer sectors. Second, financials are expected to be a leading source of S&P 500 earnings growth, just as the group was last year. Not to mention, ETFs like XLF are chock full of companies that are likely to raise their dividends this year. [Bank ETFs For Rising Dividends]
So yes, bank ETFs can bounce this year. Some adventurous traders are already betting on that as the Direxion Daily Financial Bull 3X Shares (NYSEArca: FAS) was among the leading Direxion ETFs in terms of net creations on Monday. Just be careful with the group in February.