Tough Earnings Week Ahead for Financial, Bank ETFs

Banks are also wading through an extended low-yield environment after the Fed cut its monetary policy outlook to two rate hikes later this year from previously expected four interest rate hikes. Even after tightening their belts, banks won’t find many more ways to cut expenses. The Feds slow rate hike policy will continue to put pressure on net interest margins for banks.

Consequently, traders are especially worried that this lackluster first quarter outlook for the financial sector could foreshadow a weak year ahead since banks typically make at least a third of their annual revenue in the first three months.

ETF investors can track the financial stocks and banks through a number of broad sector plays. For instance, the Financial Select Sector SPDR (NYSEArca: XLF), which tracks financial stocks taken from the S&P 500, holds a 33.3% tilt toward the banking sub-sector, including 7.9% WFC, 7.7% JPM, 4.9% BAC, 4.4% C, 2.2% GS and 1.3% MS.

For more targeted exposure to banks, the iShares U.S. Financial Services ETF (NYSEArca: IYG) has a 53.9% exposure to banks, including WFC 11.0%, JPM 10.8%, BAC 6.8%, C 6.2%, GS 3.0% and MS 1.9%.

Investors can also take a look at the more recently launched Financial services Select Sector SPDR Fund (NYSEArca: XLFS) in response to the new changes in the Global Industry Classification Standard, which will create a separate Real Estate Sector from the Financial Sector. XLFS will reflect the performance of the Financial Services Select Sector Index, which tracks areas like diversified financial services, insurance, banks, capital markets, consumer finance, thrifts, mortgage finance and mortgage REITs, excluding real estate investment trusts. The newer sector ETF also holds a hefty 34.0% tilt toward diversified banks, including WFC 9.8%, JPM 9.6%, BAC 6.0%, C 5.5%, GS 2.6% and MS 1.7%.

For even more targeted exposure, the PowerShares KBW Bank Portfolio (NYSEArca: KBWB) and SPDR S&P Bank ETF (NYSEArca: KBE) lean toward large banks. KBWB follows a market cap-weighted index, which make the index heavy on prominent banking names. KBE, on the other hand, tracks an equal-weight indexing methodology, so the ETF will include a greater tilt toward mid-cap banks. KBWB holds 8.1% C, 7.9% BAC, 7.9% JPM and 7.7% WFC. Meanwhile, KBE includes about a 2% tilt in C, BAC, JPM and WFC.

On the other hand, ETF investors who are worried about the upcoming financial earning season can also hedge the sector through various levels of leveraged inverse strategies. For instance, the ProShares Short Financials ETF (NYSEArca: SEF) takes the single inverse or -100% of financial stocks, while the ProShares UltraShort Financials (NYSEArca: SKF) takes a leveraged -200% of financials. Additionally, for the more aggressive bearish trader, the ProShares UltraPro Short Financials (NYSEArca: FINZ) and Direxion Daily Financial Bear 3X Shares (NYSEArca: FAZ) take the -3x or -300% performance of the financial sector.