Along with other sector exchange traded funds, the Financial Select Sector SPDR (NYSEArca: XLF), the largest financial services ETF, is struggling and some investors are not waiting around to see if XLF rebounds.
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. XLF is lower by more than 5% over the past month.
“During the four weeks ending Friday, the XLF, the S&P 500 financial sector ETF, has seen the largest outflows in three years,” reports CNBC. “The financials have fallen more than 4 percent while the S&P 500 has risen a bit more than 1 percent in that time. Investors have pulled roughly $2.5 billion out of financials ETFs in the last month.”
In the second quarter, investors have pulled $502.50 million from XLF.
Disappointments For Financials
XLF and other financial services ETFs were expected to be sound bets heading into this year amid expectations of multiple interest rate hikes by the Federal Reserve. The Fed has obliged, raising rates twice this year while setting the stage for perhaps two more increases before the end of 2018, but that has not moved the needle for XLF and friends.
“But at the same time, policy uncertainty and trade tariffs have placed the market on edge, causing the longer end of the yield curve to fall by almost as much as the short end has risen. This negatively impacts banks’ net interest margins, or the difference between the shorter- and longer-dated rates,” according to CNBC.
Capital levels at major U.S. banks are viewed as solid. Additionally, the Trump Administration’s tax reform effort is seen as a potential catalyst for the financial services sector, but it remains to be seen if that effort will come to life. Some industry observers expect the tax reform would help banks boost earnings in significant fashion.
Still, trade war fears are weighing on the sector in the near-term. A full-blown trade war “could knock off as much as 0.3 percent to 0.4 percent off of gross domestic product growth in the U.S. by 2020, according to Oxford Economics estimates, so we agree with the caution here,” reports CNBC.
For more information on the banking sector, visit our financial category.