ETF Trends
ETF Trends

Since the 2008 downturn, new banking regulations are costing the six largest U.S. banks billions of dollars, weighing on financial stocks and sector-related exchange traded funds.

The Financial Select Sector SPDR (NYSEArca: XLF) has gained 5.0% year-to-date, whereas the S&P 500 index is up 7.8%. Over the past five-years, XLF has shown an average return of 14.2%, lagging behind the 17.6% return from the S&P 500.

Between the end of 2013 and the end of 2007, regulatory costs increased by over 100%, or $35.5 billion, to $70.2 billion for Bank of America (NYSE: BAC), Citigroup (NYSE: C), Goldman Sachs (NYSE: GS), JP Morgan Chase (NYSE: JPM), Morgan Stanley (NYSE: MS) and Wells Fargo (NYSE: WFC), reports Saabira Chaudhuri for the Wall Street Journal. [Pricey Financials in a Precarious Spot]

The costs are specific to these banks, along with others with assets over $50 billion, due to their size and perceived risk.

Consequently, the Federal Financial Analytics argues that pre-tax earnings from these banks could diminish by $22 billion to $34 billion each year due to Dodd-Frank regulatory rules that restrict products the banks can offer, including proprietary trading, ban on certain investments and new “qualified-mortgage” lending standards.

Additionally, the analytics firm calculates that earnings for the big six dropped by $2.1 billion in 2013 as a result of the Durbin Amendment, which forced banks to offer merchants more choices of companies used to process debit-card transactions.

The broad changes to the financial regulatory landscape has weighed on the sector and related ETFs. For isntance, XLF’s holdings include BAC 5.7%, C 5.3%, GS 2.6%, JPM 7.9%, MS 1.6% and WFC 8.8%, which make up about 31.9% of the overall portfolio.

An “issue that remains a major headwind for U.S. banks is recurring regulation and litigation expenses, which continue to hit banks’ income statements,” according to Morningstar analyst Robert Goldsborough.

Financial Select Sector SPDR

For more information on the financials sector, visit our financial category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.