Financial services exchange traded funds have been laggards, but ETFs heavy on investment banks, such as the iShares US Broker-Dealers & Securities Exchanges ETF (NYSEArca: IAI), have been particularly poor performers. For example, IAI is off 10.2% year-to-date.
There are signs things are starting to look for up IAI amid increased trading activity in the bond market. IAI provides exposure to U.S. investment banks, discount brokerages and stock exchanges, including prominent names like Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), Charles Schwab (NYSE: SCHW), Intercontinental Exchange (NYSE: ICE) and CME Group (NYSE: CME).
Related: Broker-Dealer ETFs Impaired by Tepid Trading Conditions
The Federal Reserve’s string of decision to not raise interest rates this year and speculation that the central bank will not raise rates this year as many times as previously thought could increase pressure on rate-sensitive 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. Other financial services ETFs are being pinched as well and for a variety of reasons.
[related_stories]“The fixed income division at Jefferies posted revenue gains of more than 55 percent, year over year, and far outpaced its previous quarter’s tally, which — in line with the rest of Wall Street — proved disappointing. Jefferies’ total sales and trading operations garnered a 21 percent revenue increase, the bank said, to more than $462 million,” reports CNBC.
With a steepening yield curve, or wider spread between short- and long-term Treasuries, banks could experience improved net interest margins or improved profitability as the firms borrow short and lend long.
Related: Financial Sector ETFs Maintain Momentum
Financial entities like banks will benefit from expanding margins as rates climb. A rising rate environment may reflect a strengthening U.S. economy, and a healthier economy would help borrowers have an easier time repaying loans, with banks stuck with fewer non-performing assets. Moreover, rising rates means that banks will generate greater revenue from the spread between what they pay deposit savers and the prime rates they charge credit-worthy clients and other highly-rated debt.
“Jefferies is viewed by analysts as a bellwether for bigger Wall Street investment banks, because its operations are similar to theirs (though less so for consumer banks). The bank’s earnings period is slightly different from that of Wall Street investment banks. Jefferies’ most recent quarter concluded May 31, while the big banks’ fiscal second quarter will conclude at the end of June,” according to CNBC.
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iShares US Broker-Dealers & Securities Exchanges ETF
