Why Bank ETFs May Need a Rest

“With tax cuts being written into law, good reasons to expect more economic growth, regulatory relief already playing out, and a normalizing interest-rate environment, the near-term outlook for regional bank performance is certainly positive,” said Morningstar. “Incorporating these factors has caused our fair value estimates to increase across the board this year. The largest factors contributing to this change were the corporate tax rate dropping to 21%, this was from our previous assumption of a drop to 25%, as well as updated leverage assumptions, as we believe banks will now begin to shed the excess capital that they have built up in response to the post-crisis regulatory environment.”

Year-to-date, investors have pulled nearly $744 million from XLF after adding $5.59 billion to the fund last year.

“We believe that banking is in many ways a commoditized industry and that over time, increasing wage pressure, increasing competition for credit and deposits, and an eventual turning in the credit cycle will all keep returns on equity from expanding indefinitely. This will limit returns over the medium term in our view,” said Morningstar.

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