Amid Earnings Deluge, Bank ETFs Search for Momentum

ETF Trends

The financial services sector, the second-largest in the S&P 500 behind technology, is in the midst of its quarterly earnings avalanche, but the sectors exchange traded funds are still searching for precious momentum in a bid to shed the laggard label.

The Financial Select Sector SPDR (XLF) , the largest U.S. sector ETF, is up 1% since last Friday when Wells Fargo delivered its quarterly earnings report. California-based Wells Fargo is XLF’s largest at 8.7% of the $18.4 billion ETF’s weight.

Over the past six months, XLF is up 4.4%, showing a significant divergence from the SPDR S&P Bank ETF (KBE) . KBE is lower by 1.6% over that period. [Bank ETFs look to Bounce Back]

“Bank stocks, unlike those of insurance companies, asset managers and specialty finance companies, have made little net progress all year,” writes Michael Kahn for Barron’s. “While the path to mediocrity was paved with volatility, the bank ETF is trading where it was in January. Compare this to the Standard & Poor’s 500, which is up close to 8% year-to-date.”

That sentiment underscores important differences between XLF and KBE. Although XLF is often portrayed as a “bank ETF,” the truth is less than 37% of the fund’s weight is allocated to bank stocks. Insurance providers, real estate investment trusts, capital markets firms and diversified financial companies all receive double-digit allocations within the ETF. In fact, only half of XLF’s top-10 holdings have money center banking operations.

The $2.5 billion KBE allocates nearly three-quarters of its weigh to regional banks with scant exposure to asset exposure and no exposure to insurance providers and REITs.

That lineup explains why KBE has lagged XLF so severely this year. Regional banks have been hurt by declining Treasury yields, but those lower yields have been a boon for REITs and REIT ETFs. [Bank ETFs Wait on Higher Interest Rates]

As Kahn notes, the divergence between the two ETF is not necessarily bad news, but KBE’s startling lag relative to XLF is concerning.

“If we define a bull market on its simplest level as a series of higher highs and higher lows then the bank ETF is clearly not in one. Its long term chart shows a flat pattern, with not only the failure to make a new high this month but also a low in May below the one in set February,” according to Barron’s.

Investors have been devoted to XLF, pouring $552 million into the ETF this year while KBE has seen modest outflows.


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