Market observers and participants remain torn over whether the Federal Reserve will raise interest rates at its next meeting later this month. Some sectors and the corresponding exchange traded funds are really hoping the Fed decides to boost rates, namely the financial services sector.
Until last month, data suggested traders had been betting the Fed will boost borrowing costs at its September meeting, but some rate-sensitive asset classes say otherwise. Actually, Treasury yields say otherwise and 10-year yields now reside at multi-month lows, somewhat crimping ETFs tracking sectors positively correlated to rising rates, such as financial services funds. [What These ETFs Say About Rates]
But Treasury yields have ebbed, dragging the Financial Services Select Sector SPDR (XLF) , the largest financial services ETF, lower in the process.
“Financial stocks have gone from leading the S&P 500 early this summer to become the worst-performing sector in the last month. Within the sector, bank stocks have been the hit the hardest, falling 9.6 percent in one month,” reports CNBC.
After most of the financial industry revealed quarterly earnings, seven big banks are still trading below their book value, reports Jon C. Ogg for 24/7 Wall St. Book value is an accounting value that tallies the total value of a company’s asset, minus liabilities and intangibles, and compares it to the company’s market value.
However, the cheapness of U.S. banks belies the strength of the financial sector. Over few years, banks have shed unprofitable businesses and assets while bulking up capital to return some to shareholders through stock buybacks and dividends, the Wall Street Journal reports.
What is noteworthy is that higher interest rates do not guarantee robust long-term performance for bank stocks and ETFs.
“While higher rates may well serve as a tailwind for financials firms over the longer term, any immediate benefit from an interest-rate hike for financial-services firms would be muted at best, as higher rates will not translate one-for-one into higher earnings for banks,” according to Morningstar analyst Robert Goldsborough. “Bank earnings and valuations are driven more by net interest margins, which are more stable over time, than by rates themselves.”
Year-to-date, investors have pulled more than $2 billion from XLF.
Financial Services 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.