The Financial Select Sector SPDR (NYSEArca: XLF) and other financial services exchange traded funds are among the more disappointing sector-level plays this year, particularly after the Federal Reserve boosted borrowing costs last month.
A subsequent dovish tone from the Fed weighed on financial services, the S&P 500’s second-largest sector weight. As a result, XLF is up just 2% this year. With first-quarter earnings season right around the corner, some market observers believe investors should be careful in betting that earnings will meaningfully impact financial services ETFs.
“As we head into quarterly results, our expectations have been lowered, but we remain optimistic near-term that bank fundamentals will continue improving–led mostly by higher rates,” according to part of a KBW note posted by Crystal Kim of Barron’s.
KBW has mixed views on first-quarter results for some of XLF’s biggest holdings. The research firm is “raising first-quarter earnings estimates for Bank of New York Mellon (BK), State Street (STT), and Wells Fargo (WFC). He is lowering estimates for Bank of America (BAC), Citigroup (C), Goldman Sachs (GS), JPMorgan Chase (JPM) and Morgan Stanley (MS),” according to Barron’s.