No February Fun for Financial ETFs

  • Financial services ETFs show weakness across sector in 2016
  • XLF falls 2.5% in February, bringing year-to-date loss to 11.5%
  • Rival financial services ETFs such as IYF and VFH have been just as bad, if not worse

The Financial Select Sector SPDR (NYSEArca: XLF) fell 2.5% last month, bringing its year-to-date loss to 11.5%. Rival financial services exchange traded funds, such as the iShares U.S. Financials ETF (NYSEArca: IYF) and the Vanguard Financials ETF (NYSEArca: VFH) have been just as bad if not worse, underscoring the weakness in a sector that was supposed to benefit following the Federa Reserve’s interest rate hike in December.

Now some technical analysts see the financial services sector, the second-largest sector weight in the S&P 500, sending ominous signs.

“A two-year topping pattern in the benchmark KBW Bank index, known as the BKX index, had broken to the downside to indicate the start of a bear phase. Given the size of the pattern in terms of time, the two months that have elapsed is just not long enough to suggest that the bottom is near. The Financial Select Sector SPDR exchange-traded fund (XLF) follows a similar trajectory,” writes Michael Kahn for Barron’s.

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.

“The financial sector after all was supposed to be the antidote to rising interest rates. Instead, the ETFs that track this group are facing a crisis of confidence in global credit and lending practices. And this has lead to more uncertainty with financial sector ETFs,” according to See It Market.