Nearly five months into the year, investors by now know that the financial services sectors and the related exchange traded funds, such as the Financial Select Sector SPDR (NYSEArca: XLF), are big disappointments.
For example, XLF, the largest exchange traded fund dedicated to the financial services sector, is up just 2.5% year-to-date. That after the Federal Reserve boosted interest rates in March with expectations for more rate hikes later this year.
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. Although the Fed unveiled its first rate hike of 2017 last month, the central bank’s dovish tone punished regional bank stocks and ETFs.
There are some positive signs emerging for XLF and other bank-related ETFs. Investors would do well to check out the charts on some XLF’s big-name holdings.
“Failed bearish patterns often become bullish signals. We can see similar patterns in JPMorgan Chase (JPM), Bank of America (BAC), and U.S. Bancorp (USB). However, there are some big banks with patterns that already look bullish. Citigroup (C), for example, sports a trading range with rising bottoms. This is called a pennant or ascending triangle, and it usually resolves in the direction of the trend that preceded it. In this case, that would be to the upside,” reports Michael Kahn for Barron’s.
The financial sector valuations still look relatively cheap, compared to the broader market. The sector’s valuations are still about 25% below the average since the early 1990s.
Higher interest rates would help widen the difference between what banks charge on loans and pay on deposits, which would boost earnings for the financial sector. Regional banks are among the stocks most positively correlated to rising interest rates because higher rates improve net interest margins.
The SPDR S&P Regional Banking ETF (NYSEArca: KRE), the largest regional bank ETF, has been stymied this year by the surprisingly dovish Fed.
“Banks as a group seem to be close to attractive buying areas, but not quite there yet. We can rationalize that the current weakness is due to dysfunction in Washington threatening the reasons why the markets rallied after the election,” according to Barron’s.
For more information on the financial sector, visit our financial category.