Traders Turn Bearish on a Big Bank ETF

Some traders are getting bearish on financial services stocks and the related exchange traded funds. The Financial Select Sector SPDR (NYSEArca: XLF), the largest ETF tracking the sector, is lower on a quarterly basis and looks poised to finish May with a monthly loss.

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’s recent dip has sparked a wave of bearish options activity on the ETF.

“Specifically, 180,589 puts and 148,366 calls have changed hands on XLF so far today — nearly three times what’s typically seen at this point, and total options volume pacing in the 95th annual percentile. Most active are the July 26 put and 28 call, where data from Trade-Alert suggest one speculator may be closing out of a risk-reversal, or synthetic long, strategy,” according to Schaeffer’s Investment Research.

Looking For Support

Fundamental factors, including the aforementioned rising interest rates, have been supportive of bank stocks and ETFs this year. Additionally, the financial services sector, the second-largest sector weight in the S&P 500, has had the regulatory wind at its back this year as the Trump Administration has sought to roll back parts of the Dodd-Frank legislation. Still, the sector is disappointing investors.