As Earnings Season Arrives, Financial ETFs Offer Opportunity

While the financial sector has been plagued by misfortunes, with the Brexit as the most recent catalyst, U.S. banks and financial-related exchange traded funds may hold up better than their global counterparts. Investors will also find further insights to how our financial industry is doing this week as the bank-earnings season goes into full swing.

The Financial Select Sector SPDR (NYSEArca: XLF), iShares U.S. Financials ETF (NYSEArca: IYF) and Vanguard Financials ETF (NYSEArca: VFH) cover one of the worst performing areas of the market of 2016, falling over 2% year-to-date, compared to the S&P 500 Index’s 5.8% gain.

“Today’s environment is depressing for banks,” according to a BlackRock note. “Challenges include low or negative interest rates, regulatory pressures including more stringent requirements, a bad loan hangover from the crisis era in Europe and new competition from ‘fintech’ disruptors.”

Related: Central Banks Playing Chutes and Ladders

The market expectations for another interest-rate increase by the U.S. Federal Reserve have been pushed back, diminishing the outlook for banks’ lending margins. Long-term interest rates are back near historic lows, depressing investments in financial instruments like mortgage-backed securities. Meanwhile, trading, underwriting and merger activity may remain muted in a post-Brexit environment.