The Financial Select Sector SPDR (NYSEArca: XLF), the largest exchange traded fund dedicated to the financial services sector, and rival financial ETFs are getting drubbed this year. XLF’s December loss of about 8% extends the fund’s year-to-date loss to over 12%.
The 2018 performances of XLF and rival financial services ETFs are undoubtedly disappointing for investors that bet the sector would rally against the backdrop of rising interest rates. The Federal Reserve has boosted borrowing costs three times, moves many market observers believed would lift the fortunes of the rate-sensitive financial sector.
Interestingly, some options data suggest traders are betting on a January rebound for the beleaguered XLF, an ETF that currently resides 11.62% below its 200-day moving average.
Late Thursday, “around 144,000 puts have changed hands, compared to 73,000 calls. Trade-Alert highlights a potential risk-reversal, or synthetic long, strategy, using XLF’s January 2019 22-strike puts and 25-strike calls, which would imply expected upside of more than 2% by the close on Friday, Jan. 18,” according to Schaeffer’s Investment Research.
The Other Side
Other factors may be hampering the sector. Some market observers warned that banks may even be cutting back on lending as bankers are becoming more concerned over the late-cycle U.S. economy. Indicators such as credit-card charge-off rates have increased, though the rate leveled off over the summer.
While XLF and rival financial services ETFs are clearly struggling, data indicate there has been some speculative, bullish buying in XLF call opitions.
“More broadly speaking, speculative players have been initiating long puts relative to calls at a faster-than-usual pace in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the fund’s 10-day put/call volume ratio of 1.90 ranks in the 83rd annual percentile,” according to Schaeffer’s.
Investors have pulled $1.94 billion from XLF in the fourth quarter, a total surpassed by just four other ETFs.
For more information on the market sectors, visit our sector ETFs category.