Flat Yield Curve Saps Financial ETFs

The Federal Reserve again raised interest rates on Wednesday, marking the fifth time it has done so since the start of 2017. Bond market observers believe the Fed could increase rates two more times before the end of this year, but that is not preventing departures from some exchange traded funds tracking financial services stocks.

Earlier this year, financials were also propped up by a rise in bond yields as higher interest rates typically widen the margin spread between bank loans and deposits. The spreads will further widen as the Federal Reserve has stated its intentions to raise interest rates in response to economic growth and rising inflation.

However, the The Financial Select Sector SPDR (NYSEArca: XLF), the largest ETF tracking the sector, is now sporting a second-quarter loss of almost 5% and data indicate some investors are leaving the Vanguard Financials ETF (NYSEArca: VFH).

VFH’s $160 Million in Outflows

VFH “had almost $160 million of outflows on Tuesday, the most since September 2016. It also saw a spike in activity Wednesday, as investors traded $156 million, or more than triple the average daily volume for the past year. A $48 million trade was the day’s largest and appeared to be a block sale,” reports Bloomberg.

The Vanguard fund is the second-largest financial services ETF after XLF. Some market observers actually believe two more rate hikes could hamper bank stocks. Conventional wisdom usually dictates that the financial services sector is often positively correlated to higher interest rates.