Be Careful With Bank ETFs This Week

The Financial Select Sector SPDR (NYSEArca: XLF), the largest exchange traded fund dedicated to the financial services sector, rose 1.3% last week. Perhaps some of that ebullience is attributable to expectations of the Federal Open Market Committee (FOMC) raising interest rates when it meets later this week, but this is a movie investors have seen before and it could leave them disappointed.

After all, the Fed raised rates in March, but after sounding a surprisingly dovish tone, the U.S. central bank sent XLF and rival financial services ETFs on a path of mediocrity this year. In fact, only the energy sector is performing worse than financial services this year.

Some bond traders expect the Fed to raise rates again, perhaps as soon as this month, which could give XLF and rival ETFs a near-term boost. However, investors should temper their expectations for big gains by bank ETFs this week.

“XLF call options are flying off the shelves. However, buyers should beware, if recent history is any indicator: bank stocks tend to underperform during Fed weeks, and the highly anticipated Federal Open Market Committee (FOMC) meeting is right around the corner. Below, we’ll take a closer look at XLF, as well as three finance stocks that could fall short,” this week, reports Schaeffer’s Investment Research.

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 in March, the central bank’s dovish tone punished regional bank stocks and ETFs.