The Financial Services Select Sector SPDR (NYSEArca: XLF), the largest financial services exchange traded fund, has fallen nearly 3% over the past week and the Federal Reserve’s refusal to raise interest is almost universally cited as the reason why bank stocks and ETFs are struggling.
Until last month, data suggested traders had been betting the Fed will boost borrowing costs at its September meeting, but some rate-sensitive asset classes say otherwise. Actually, Treasury yields say otherwise and 10-year yields now reside at multi-month lows, somewhat crimping ETFs tracking sectors positively correlated to rising rates, such as financial services funds. [What These ETFs Say About Rates]
But in a post-no hike environment, XLF and other financial services ETFs are facing technical difficulties that make the prospect of near-term upside murky at best. The SPDR S&P Bank ETF (NYSEArca: KBE), an ETF heavy on rate-sensitive regional banks, is another marquee bank fund facing technical difficulties.
“Since Aug. 25, the day after the 1,000-point intraday drop in the Dow Jones Industrial Average, the ETF formed a clear rising wedge formation. The analysis ignores the out-of-whack low seen Aug. 24 itself when scores of ETFs were mispriced in the early moments of trading that day,” reports Michael Kahn for Barron’s.
Bank valuations are also back up. Looking at price-to-book multiples, the most popular measure for valuing the sector, U.S. banks of the KBW banks index are trading near fair value at a 16% premium to book value, or about the same valuations in the summer of 2008. The sector has shown it is capable of trading a even higher valuations of three or even five times book value, but banks are unlikely to return to the late 199s levels. [Muted Bank ETF Expectations]