Financial Sector ETFs Still Face Headwinds
While still strengthening along with the broader markets, financial sector exchange traded funds face headwinds.
Year-to-date, the Financial Select Sector SPDR (XLF) rose 4.8%, Vanguard Financials ETF (VFH) increased 5.1% and he iShares U.S. Financials ETF (IYF) gained 4.5%. [Financials ETFs Could Continue Languishing]
The Federal Reserve’s annual stress test on the largest banks in the U.S. revealed that some of the largest lenders face a lack of robustness, writes Robert Goldsborough for Morningstar.
The sector still has to muddle through increased compliance, regulatory and legal costs due to stricter rules following the financial crisis.
Additionally, the slow expansion in the U.S. economy has raised concerns about banks, which typically withhold lending in a weaker economic environment.
Consequently, Morningstar analysts currently view the financial sector as fairly valued. Nevertheless, the sector could rebound if the economy improves. A healthier economy would allow the Federal Reserve to cut back on easy money policies and raise rates, which would likely go with greater lending from banks.
“Banks have underperformed the overall U.S. equity market thus far this year, amid stress-test results and a general sector rotation away from financial services,” Goldsborough said.
Looking at financial sub-sectors, insurance picks like the SPDR KBW Insurance ETF (KIE) have underperformed. KIE is up 2.5% year-to-date. [Insurance ETFs Languish in Low-Rate Environment]
“Insurance firms also have lagged amid strong debt and equity markets, which tend to force down insurers’ prices and thus returns on invested capital,” Goldsborough said.
Meanwhile, REITs have surged as rates dipped this year, and an expanding economy has also increased occupancy rates, which have translated to higher rents on tenants. The Vanguard REIT ETF (VNQ) is up 18.1% year-to-date. [REIT ETFs Enjoying Strong Fundamentals]
For more information on the financials sector, visit our financial category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
