Why Financial ETFs Can Bounce Back

The financial services sector, the third-largest sector weight in the S&P 500, has been a source of considerable disappointment for investors this year. The Financial Select Sector SPDR (NYSEArca: XLF), the largest exchange traded fund dedicated to the sector, is off almost 10 percent this year, a decline that has materialized against the backdrop of three interest rate increases by the Federal Reserve.

Some market observers warned that banks may even be cutting back on lending as bankers are becoming more concerned over the late-cycle U.S. economy. Indicators such as credit-card charge-off rates have increased, though the rate leveled off over the summer.

However, the group is significantly oversold, which could give way to a near-term rally. In addition to XLF, the SPDR S&P Bank ETF (NYSEArca: KBE) is another bank ETF that is well into oversold territory.