A Cloudy Forecast for Bank ETFs

The Financial Select Sector SPDR (NYSEArca: XLF), the largest exchange traded fund tracking the financial services sector, is one of the worst-performing sector SPDR ETFs this year. Many rival financial services ETFs have been just as bad if not worse than XLF. Few have been better.

Those are ominous statements to be sure, but making matters are the more downbeat for XLF and rival financial services funds is that few professional traders see legitimate near-term upside looming for the sector. In fact, some pros are increasingly downbeat on bank stocks.

While banks have struggled to reduce costs and add new income to counter a low-rate environment, many have previously bet on Federal Reserve interest rate hikes to support the sector. However, some are growing pessimistic over the sector’s ability to add value, even in a rising rate environment.

Oil’s bear market has been cited as one of the reasons for the struggles of the financial services sector. J.P. Morgan plans to add $500 million to reserves for oil and gas and an additional $100 million related to metals and mining in the first quarter. The additions come on top of the bank’s $815 million in oil-and-gas reserves and $240 million in metals and mining as of the end of 2015.

The disclosures followed a worsening energy loan outlook. HSBC Holdings (NYSE: HSBC) recently revealed growth in loan-impairment charges in the fourth quarter to $1.65 billion from $1.01 billion year-over-year, with most of the charges related to a struggling energy sector.

Some traders are targeting downside in Wells Fargo (NYSE: WFC), one of XLF’s largest holdings.