The Financial Select Sector SPDR (XLF) has been a solid performer for most of this year, but recent price retrenchment in the ETF has dropped to fourth place among the nine SPDR ETFs on a year-to-date basis. XLF now trails its health care, consumer discretionary and industrial counterparts after spending most of the year in no worse than the third spot.
Investors have rewarded XLF and other bank ETFs with bountiful inflows. XLF, the largest ETF financial services ETF, has raked in over $4 billion this year, a figure that not only puts XLF well ahead of any other sector fund, but one that also ranks it among the top-10 asset-gathering ETFs of all types. [XLF Races for Inflows Bronze Medal]
However, there are signs, both news-driven and technical, that XLF and rival financial services ETFs could extend their recent declines. Citigroup (NYSE: C), XLF’s fourth-largest holding at a weight of 6.2%, has lost almost 3% in the past five trading days due to poor news flow. On Monday, the company said it will cut 1,000 mortgage jobs. On Sunday, it was reported that Citi’s third-quarter bond trading revenue could be hit by slides in the bank’s interest-rate and currencies business. [Citigroup Earnings Drive Outperforming Bank ETFs]
Add to that, technical analyst Chris Kimble said both Citi and XLF created bearish wicks on their charts last week. “Citigroup is at the top of its sideways channel, which it has had a hard time breaking from since the highs it reached back in 2009,” said Kimble.
Traders are now speculating news of weak third-quarter trading revenue will not be confined to Citi. On Monday, S&P Capital IQ lowered its price target on the stock to $55 from $57. On Monday, XLF components Goldman Sachs (GS), JPMorgan Chase (JPM) and Wells Fargo lost 2.7%, 2.5% and 1.3%, respectively. Those stocks combine for nearly 19% of XLF’s weight.
The mortgage side of the business is just as problematic for some XLF holdings. In addition to Citi, XLF components JPMorgan Chase, Wells Fargo and Bank of America (BAC) have shed mortgage jobs this year because rising interest rates have led to decreased demand for new home loans and refinances. JPMorgan previously warned its mortgage unit may even lose money in the second half of this year.
Wells Fargo plans more than 2,300 job cuts and New York-based JPMorgan may dismiss 15,000 by 2014, report Hugh Son and Dakin Campbell for Bloomberg.
Aggressive traders looking to profit from further declines in the financial services sector can consider leveraged inverse ETFs such as the ProShares UltraShort Financials (SKF) and the Direxion Daily Financial Bear 3X Shares (NYSEArca: FAZ).
Financial Select Sector SPDR
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.