U.S. financial sector exchange traded funds are gaining momentum, with lenders generating near-record profits over the second quarter, as banks trim costs and raise loan balances.
The financial sector has been slightly outpacing the broader market. The Financial Select Sector SPDR (NYSEArca: XLF) has gained 1.7% over the past week and rose 1.9% over the past month while the Vanguard Financials ETF (NYSEArca: VFH) is up 1.5% over the past week and 1.7% higher over the past month. Meanwhile, the S&P 500 is up 0.7% and 1.3% over the past week and month, respectively. Banks make up 46.3% of VFH and 36.6% of XLF [Financial Sector ETFs Picking Up the Pace]
Alternatively, for greater bank exposure, the iShares U.S. Financial Services ETF (NYSEArca: IYG) includes a 55.6% weight toward banks and 43.8% toward financial services. The SPDR S&P Bank ETF (NYSEArca: KBE) solely focuses on banks. Over the past week, IYG is up 2.0% and KBE gained 1.6%.
According to the Federal Deposit Insurance Corp., banks’ loan and lease balances expanded by $178.5 billion to $8.1 trillion, a 2.3% rise over the previous quarter and the biggest quarterly gain since the last quarter of 2007. [Financial ETFs Could Bank on Rising Profits]
“Net income was up, asset quality improved, loan balances grew at their fastest pace since 2007, and loan growth was broad-based,” Gruenberg said in a Bloomberg article, adding that challenges facing banks include pressure from narrow net interest margins and “increasing higher-risk loans to leveraged commercial borrowers.”
Additionally, the FDIC contributed to the improved earnings in the banking sector to lower expenses. Specifically, financial results for the second quarter came in at a combined net income of $40.2 billion, or 5.3% more than the same period year-over-year.
“Earnings benefited from lower expenses for loan-loss provisions, goodwill impairment, and payrolls,” the FDIC said. “A majority of banks – 57.5 percent – reported year-over-year increases in quarterly earnings, and only 6.8 percent of banks were unprofitable, down from 8.4 percent a year ago. This is the lowest proportion of unprofitable institutions since first quarter 2006.”
Lastly, the number of so-called problem banks, or institutions at risk of failure, has declined to 354 from 411 – the smallest number of problem institutions since the end of the first quarter of 2009 and 60% below the most recent peak of 888 problem institutions at the end of the first quarter for 2011.
Financial Select Sector SPDR
For more information on the financial sector, visit our financial category.
Max Chen contributed to this article.