Bank and financial sector-related ETFs have been underperforming despite the rising interest rate environment, and the segment of the market may continue to drag its feet.
The Financial Select Sector SPDR (NYSEArca: XLF) rose 1.2% and SPDR S&P Bank ETF (NYSEArca: KBE) gained 2.5% so far this year, whereas the S&P 500 increased 10.1%.
Despite the Federal Reserve’s intention to continue raising interest rates, Matt Maley, equity strategist at Miller Tabak, highlighted the recent underperformance in banks and issued a warning over the weakness, CNBC reports.
“Remember at the beginning of the year, we had people calling for 3.5 percent, 4 percent, or higher [on the 10-year Treasury note yield]. That hasn’t panned out. These bank stocks haven’t rallied either,” Maley told CNBC, adding too that utility stocks have rallied in the face of rising rates, when typically they suffer.
“I think these two groups are telling us that they do not see a big breakout in interest rates, at least in the long-term interest rates, anytime soon,” Maley said.
Investors who are wary of further trouble in the financial sector may also look to inverse or bearish ETFs to hedge risk. Aggressive traders may look to leveraged inverse options like the Direxion Daily Financial Bear 3X Shares (NYSEArca: FAZ), ProShares UltraPro Short Financials (NYSEArca: FINZ) and Direxion Daily Regional Banks 3x Bear Shares (NYSEArca: WDRW).
Less aggressive traders can use the ProShares Short Financials ETF (NYSEArca: SEF), which takes the single inverse or -100% of financial stocks, and the ProShares UltraShort Financials (NYSEArca: SKF), which takes a leveraged -200% of financials.
Yields on benchmark 10-year Treasury notes were hovering around 2.98% Friday.
Mark Tepper, president and CEO of Strategic Wealth Partners, argued that the weakness in banks is attributed to the yield curve flattening where yields on the short end are rising, whereas later-dated Treasury yields remain depressed. The flattening yield curve depresses banks’ net interest margins and weigh on their company stocks.
“We are a believer in higher interest rates, we do think they’re going to go higher over the course of the next year, but we also have a contrarian perspective on what that actually means for bank stocks. Yes, rising interest rates can in theory help net interest margins, but they can also curb lending,” Tepper told CNBC.
For more information on the financial sector, visit our financial category.