A Flat Yield Curve Could Put Pressure on Financial ETFs | ETF Trends

Investors may lose interest in financial sector-related exchange traded funds in the short-term as the Federal Reserve hikes interest rates and the yield curve flattens out.

For instance, the Vanguard Financials ETF (NYSEArca: VFH) experienced almost $160 million in net outflows Tuesday and saw $156 million exchange hands on Wednesday, or more than triple the average daily volume for the past year, report Carolina Wilson and Sarah Ponczek for Bloomberg.

Falling longer-term yields hurt bank profits since it narrows the spread banks can earn between their longer-term assets that are funded with shorter-term liabilities.

Bank Profits Squeezed

“Banks generally borrow short and they lend long,” Mark Hackett, chief of investment research at Nationwide Funds Group. “So the fact that the 10-year is really not moving while the short end is moving higher will actually temporarily choke off some of the net interest margin.”

Yields on benchmark 10-year Treasury yields are hovering around 2.94%. Meanwhile, yields on 2-year notes are now at 2.57% and yields on 12-month notes are at 2.31%.