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Fragility Seen in Financial Services ETFs


Just a few days after most large U.S. banks aced the Federal  Reserve’s stress tests, bank stocks and exchange traded funds face another potentially positive catalyst.

On Wednesday, the Fed is expected to reveal the results of its annual Comprehensive Capital Analysis and Review (CCAR), which will detail the eligibility various banks to increase dividends and share repurchase program. [One Stress Test Failure Didn't Hurt These ETFs]

Even with that looming catalyst, some technical analysts have reservations about financial services ETFs. Those reservations come with ETFs such as the Financial Select Sector SPDR (XLF) trading near their highest levels since 2008.

Last month, the KBW Bank Index “dipped below the trendline drawn from the November 2012 bottom, when the index and the market as a whole set an important low. After only a few days, however, it began to rally again and the breakdown failed. In technical analysis, failed bearish signals often become bullish signals and that is what happened here – at least through last week,” reports Michael Kahn for Barron’s.

The PowerShares KBW Bank Portfolio (KBWB) is the ETF that tracks the KBW Bank Index. The $166.9 million ETF provides investors with ample leverage to large-cap U.S. banks that should benefit from positive CCAR news. Bank of America (BAC), J.P. Morgan Chase (JPM), Citigroup (NYSE: C) and Wells Fargo (WFC) combine for about 31% of the ETF’s weight. KBWB is up 5.6% in the past month. [Bank on Rising Bank Dividends With These ETFs]

Regarding XLF, which is heavy on investment banks and insurance firms in addition to money center banks, “there is little else on the chart to suggest this ETF has peaked. Relative performance vs. the market is rising. Trendlines and moving averages are still intact. Only volume indicators hint at anything other than a strong sector,” according to Barron’s. XLF is up 3.5% in the past month and is the fourth-best of the nine sector SPDR ETFs on a year-to-date basis.  [Rotating Through Strong Sector ETFs]

The $2.6 billion SPDR S&P Bank ETF (KBE) is one to keep an eye, notes Barron’s. Home to 56 stocks, KBE is an equal weight mix of large money center banks and regional banks.  KBE saw a bearish reversal on high volume last Friday, according to Barron’s, and although the ETF is up 6% in the past 90 days, last Friday’s action, could be a sign the next few days are critical to the fund’s near-term fortunes.


ETF Trends editorial team contributed to this post.

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.