Financial ETF Investors Hold Their Breath Ahead of Stress Test | ETF Trends

Financial companies and sector-related exchange traded funds could find it harder to provide value for investors as industry’s ability to implement dividends and buybacks hinges on Federal Reserve stress test results.

For example, Citigroup (NYSE: C) has been under pressure as it prepares for the results of the banking stress test a year after failing the annual review on the grounds that it held inadequate reserves, Financial Times reports.

Citigroup is among the largest components in many financial sector-related ETFs, including 5.4% of the Financial Select Sector SPDR (NYSEArca: XLF), 8.2% of PowerShares KBW Bank Portfolio (NYSEArca: KBWB) and 7.1% of iShares U.S. Financial Services ETF (NYSEArca: IYG). [New Tax Proposal Targets Financial Sector, ETFs]

As part of the stress test too obviate or at least diminish the effects of another financial crisis, the Fed requires banks with over $50 billion in assets to submit their capital-distribution plans for approval.

Citigroup failed to meet necessary capital requirements and was denied its dividend and stock buyback plans last year. The company stock declined 5.4% the day after the Fed’s rejection last year and only gained 4.5% over the 11 months after the announcement, underperforming the broader market.

Market observers have also placed Bank of America (NYSE: BAC), the country’s second-largest lender, under greater scrutiny after a filing showed regulators demanded changes to some of the bank’s models, Bloomberg reports.