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A Buying Opportunity in a Downtrodden Sector

This article was originally published on ETFTrends.com.

Things are going from bad to worse for the financial services sector. As markets sank last week on the back of a disappointing November jobs report, the Financial Select Sector SPDR (NYSEArca: XLF) , followed suit, extending its year-to-date decline to over 10%.

The 2018 performances of XLF and rival financial services ETFs are undoubtedly disappointing for investors that bet the sector would rally against the backdrop of rising interest rates. The Federal Reserve has boosted borrowing costs three times, moves many market observers believed would lift the fortunes of the rate-sensitive financial sector.

Some market observers are betting the sector's recent woes present investors with a buying opportunity in financials, the S&P 500's third-largest sector allocation. The SPDR S&P Bank ETF (KBE) is an example of a tattered financial services ETF with rebound potential.

“The KBE bank ETF has tumbled 6 percent since Monday with major banks like Citigroup and Bank of America tanking by more than 8 percent,” reports CNBC. “ After sounding the alarms for the group, Matt Maley, equity strategist at Miller Tabak, has had a change of heart.”

Market Issues To Consider

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.

Higher interest rates would help widen the difference between what banks charge on loans and pay on deposits, which would boost earnings for the financial sector. Regional banks are among the stocks most positively correlated to rising interest rates because higher rates improve net interest margins.

A slumping residential real estate market could also hamper ETFs such as KBE and XLF going forward.

"I've been very bearish on the group all year long but we're now getting to some levels here," Maley said Thursday on CNBC's "Trading Nation." "If you look at the KBE bank ETF which just has banks in it and no credit cards or insurance companies, it's getting down to its 200-week moving average. That level is also the same level that we saw at its lows in 2017."

For more information on the banking sector, visit our financial category.

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