ETF Trends
ETF Trends

Plagued by slumping oil prices and speculation that the Federal Reserve might not be able to raise interest rates this year, the Financial Select Sector SPDR (NYSEArca: XLF) and rival financial services exchange traded funds have been among this year’s worst-performing sector ETFs.

Contributing to the weakness in the bank sector, traders may have been unwinding bullish bets in the run-up to the Federal Reserve’s first rate hike in December, reports Stephen Foley for the Financial Times. Investors hoped that higher rates would allow banks to capitalize on wider net interest margin – the difference between deposit rates and lending rates, but the global economic uncertainty has weighed on prospects for a quick Fed rate hike schedule.

While U.S. banks have some exposure to over-leveraged oil companies, the level of exposure to the distress energy industry is not up to the scale of the U.S. housing market that triggered the 2008 run. Nevertheless, market observers are weighing on the oil outlook in the recent earnings season.

If there is good for wary investors in ETFs such as XLF it is that some analysts see the sector’s slump as being close to over with the potential of out-performance lingering through the rest of this year.

“The good news? UBS said excluding the financial crisis of 2008 to 2009, bank stocks have dropped by about 25% to 30% peak to trough, on average, over the last several downturns and market shocks. That suggests the current selloff may have already priced in an economic recession, meaning bank stocks are “at or near the bottom,” UBS analysts wrote in a note to clients,” reports Tomi Kilgore for MarketWatch.

Markets may be trying to discern shapes in the shadows where there are none, overreacting to the recent spate of economic weakness. For instance, banking analyst Mike Mayo argues that Wall Street banks are trading at “recession prices but no recession.” On a price-to-tangible book value, banks have dipped to levels below pre-financial crisis, and some bank stocks are now trading below book value.

Financial Select Sector SPDR

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.