With U.S. stocks trading lower Thursday, it is not surprising that financial services exchange traded funds are weaker as well. After all, the sector is the second-largest in the S&P 500 behind technology.
Thursday weakness for the likes of the Financial Select Sector SPDR (NYSEArca: XLF), Vanguard Financials ETF (NYSEArca: VFH) and the iShares U.S. Financials ETF (NYSEArca: IYF) comes despite Wednesday’s news that Bank of America (NYSE: BAC), for a third time, is asking federal regulators to approve its plan to boost its quarterly dividend to five cents from one cent per share.
Following the Federal Reserve’s annual Comprehensive Capital Analysis and Review (CCAR) results, the central bank permitted BofA to boost payouts and buybacks for the first time since the financial crisis, but in late April BofA said it will suspend its planned $4 billion share repurchase plan and its previously announced dividend increase due to a calculation error related to the company’s acquisition of Merrill Lynch during the crisis. [Financial Services ETFs Contend With Bad Dividend News]
Even if BofA can deliver some good news on the dividend front, it may be too little too late for the aforementioned ETFs due to mounting signs of technical weakness. J.C. Parets of Eagle Bay Capital notes XLF’s relative strength against the S&P 500 is flirting with a critical support area, a potentially ominous sign for the bank ETF’s near-term fortunes.
The outlook for VFH is no more rosy than it is for XLF.
VFH’s “chart suggests that a potentially bearish outlook for this US Financials Sector ETF may be developing. The first piece of evidence is today’s downside gap. The second is that VFH may be undergoing a technical breakdown on the relative strength chart,” according to J. Beck Investments.
Beck goes on to note that the recent technical damage incurred by VFH will take time to repair and that there currently is not enough evidence to merit allocating fresh capital to bank stocks and ETFs.
Interestingly, weakness for bank ETFs in July has arrived at a time when these funds should be perking up. XLF has been the second-best of the nine SPDR ETFs in the month of July since 1999. [Sector ETF Ideas for July]
In addition to those ominous signs, there is this: Over the past 30 days, there has been positive creation activity in the Direxion Daily Financial Bear 3X Shares (NYSEArca: FAZ), according to Direxion data.
Financial Select Sector SPDR
ETF Trends editorial team contributed to this post.