Bank ETFs Still Merit Caution

Financial services exchange traded funds, including the Financial Select Sector SPDR (NYSEArca: XLF) and the SPDR S&P Bank ETF (NYSEArca: KBE), have been sector-level laggards this year. With U.S. interest rates remaining low and the Federal Reserve seemingly not on course to do anything about that anytime soon, pressure remains on the S&P 500’s second-largest sector allocation.

XLF rival financial services ETFs started this year off as laggards but shed that laggard status as many market participants began pointing to June and July as ideal times for the Fed to boost rates. Obviously, that did not happen this month and that is encouraging some traders to turn bearish on XLF or hedge long positions in the ETF.

Related: Financial Sector ETFs Maintain Momentum

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.


“With the rates on 10- and 30-year Treasury securities dipping to all-time lows earlier this month, the recent corrective bounce seems to be part of the normal ebb and flow within the trend. And with yields on many short- and even long-term government bonds around the world actually offering negative yields conditions do not seem ripe for any sustained increases. That should keep the pressure on bank earnings and bank stock prices,” reports Michael Kahn for Barron’s.

Heading into this year, many market observers expected four Fed rate hikes, a number that subsequently dropped to two and now, in the eyes of some experts, zero.