The Financial Select Sector SPDR (XLF) , the largest exchange traded fund (ETF) tracking the financial services sector, and rival financial services ETFs are struggling this year.
While banks have struggled to reduce costs and add new income to counter a low-rate environment, many have previously bet on Federal Reserve interest rate hikes to support the sector. However, some are growing pessimistic over the sector’s ability to add value, even in a rising rate environment.
The Fed’s reluctance to raise interest rates has been especially punitive for rate-sensitive regional banks and the corresponding ETFs, such as the SPDR S&P Regional Banking ETF (KRE) , the largest regional bank ETF, which have been thirsting for higher interest rates.
Investors daring enough to nibble at bank stocks have options in addition to XLF and KRE, such as the iShares U.S. Regional Banks ETF (IAT) and PowerShares KBW Regional Bank Portfolio (KBWR) . These regional bank ETFs all include greater tilts toward smaller banks.
Additionally, the SPDR S&P Bank ETF (KBE) and PowerShares KBW Bank Portfolio (KBWB) lean toward larger companies. KBWB follows a market cap-weighted index, which make the index heavy on prominent banking names. KBE, on the other hand, tracks an equal-weight indexing methodology, so the ETF will include a greater tilt toward mid-cap banks.
Trending on ETF Trends
Some risk tolerance is required with these other bank ETFs.
“Given these conditions, it remains appropriate to maintain a neutral/bearish stance in these markets. With that being said, these sectors could work through their overhead supply and bearish conditions by continuing to correct through time. I think that is the lower probability outcome, therefore I’m going to outline where they have the potential to go if they correct through price,” according to See It Market.
KRE’s sensitivity to interest rates is well known. The ETF rose just 2% in 2014 after surging 47% in 2013 when yields spiked. KRE’s holdings have an average beta of +0.44 to moves in the US 10 Year Treasury.
An improving U.S. economy could foster increased borrowing and financing by businesses, large and small, across the U.S. while benign mortgage rates could also provide a lift to the mortgage lending operations of regional banks.
“Prices consolidated for the past several weeks as they attempted to work through the overhead supply in a healthy way, but are now resolving to the downside and confirming the bearish momentum divergence. KRE looks likely to retest the uptrend line from the February lows and support near 38.60. If that support fails to hold, prices will likely test former support near 36, followed by the February lows of 32.63. And this would weigh heavy across regional bank stocks,” adds See It Market.
For more information on the Banks ETF market, visit our Banks category .
Financial Select Sector SPDR
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.