Struggle and Trouble Ahead for Bank ETFs?

The Financial Select Sector SPDR (NYSEArca: XLF), the largest exchange traded fund (ETF) tracking the financial services sector, and rival financial services ETFs are struggling this year.

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.

Related: 4 Reasons to be Optimistic about Bank ETFs

The Fed’s reluctance to raise interest rates has been especially punitive for rate-sensitive regional banks and the corresponding ETFs, such as the SPDR S&P Regional Banking ETF (NYSEArca: KRE), the largest regional bank ETF, which have been thirsting for higher interest rates.

Investors daring enough to nibble at bank stocks have options in addition to XLF and KRE, such as the iShares U.S. Regional Banks ETF (NYSEArca: IAT) and PowerShares KBW Regional Bank Portfolio (NYSEArca: KBWR). These regional bank ETFs all include greater tilts toward smaller banks.

Additionally, the SPDR S&P Bank ETF (NYSEArca: KBE) and PowerShares KBW Bank Portfolio (NYSEArca: KBWB) lean toward larger companies. 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.


Some risk tolerance is required with these other bank ETFs.