The financial services sector, the second-largest sector allocation in the S&P 500, and the corresponding exchange traded funds, such as the Financial Select Sector SPDR (NYSEArca: XLF), have endured some tumult this year as the Federal Reserve has continually put off raising interest rates.
However, European banks are disappointing investors even more. For example, the iShares MSCI Europe Financials ETF (NYSEArca: EUFN), which tracks European financial companies, is down nearly 11% this year.
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Among the near-term issues facing EUFN is the June 23 Brexit vote. The financial sector is among the most at risk if the U.K. decides to part ways with the European Union. Fro instance, according to a recent Keef, Bruyette & Woods research note, banks would have to raise administrative expenses, add on regulatory costs, cut staff and potentially take a temporary earnings hit if British voters approve the Brexit on June 23. Specifically, a leave vote would cause big banks to transition U.K. staff to cities in the E.U. to meet regulatory requirements. Meanwhile, in the U.S., costs would increase and capital market activity could decline.
EUFN could be among the hardest hit if the Brexit passed. EUFN includes a 31.2% tilt toward U.K. companies, including HSBC Holdings 8.2% of the fund’s portfolio and Lloyds Banking Group 3.9%.
[related_stories]However, there are some potentially encouraging technical signs for EUFN. Looking at the ETF’s chart , “it can be conceived that these European financial stocks are attempting to stabilize. A higher low versus the February bottom would be constructive. On the flip side, a break below the February lows could potentially drag Europe and other broad-based international stock market indexes lower as concerns over wider financial issues take hold,” according to See It Market.
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In Italy, regulators are currently working to configure a bad debt company of sorts to help Italian banks deal with a rising non-performing loan problem. Italy is part of EUFN’s geographic lineup. Earlier this year, Economy Minister Pier Carlo Padoan called a meeting in Rome with executives from Italy’s top financial institutions on Monday to hash out a plan for a state-backed fund to acquire bad loans and cover capital shortfalls, reports Silvia Aloisi for Reuters.
“This European Financials ETF has appeared to ride a rollercoaster of price action over the last four months. It will be an important index to watch through the summer months as the referendum for the United Kingdom exiting the European Union takes place. Financial and banking stocks in the U.K. make up nearly one-third of the portfolio holdings in EUFN,” adds See It Market.
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iShares MSCI Europe Financials ETF
