Income increases but bank ETFs hesitate

Despite good results for the financial sector during the first quarter, the sector with the second largest weight in S&P 500, Bank ETFs do not succeed in gaining investor confidence. In the last week is Financial Select Sector SPDR (NYSEArca: XLF), the largest exchange traded fund tracking the financial services sector, backed by almost one percent.

According to FactSet, S & P 500 financial companies report an increase in earnings of 20% for the quarter compared with the broad index 17%. Earlier this year, finances were also strengthened by rising bond yields, because higher interest rates usually increase the margin distribution between the bank loans that the banks give and what it costs the banks to borrow money from Ditt savings account. Spreads will widen further as the Federal Reserve has stated its intention to raise interest rates in response to economic growth and rising inflation. Nevertheless, the revenue season has not been the catalyst expected for the sector.

“Investors have received some debt for the increase in credit card fraud, the decline in borrowing requirements and the still flattening yield curve. Remember that the spread between the two-year and 10-year government bonds just noted a new 11-year low. It is now traded at less than 45 points (less than half of 1 percent) “, says Miller Tobacco Equity Strategist Matt Maley in a post on CNBC.com.

Deal with the disappointment of the banks

Liberalization can also help the financial sector to improve its margins. President Donald Trump has shown his zeal to cut bureaucracy and remove some of the post-financial crisis rules that have stifled the industry. The rising interest rate environment is also good for net interest income for banks and even more so for insurance companies.

“It is important to remember that the major bank shares are in the habit of reversing when they report results, and that's another reason I'll be watching them so closely this week”, according to Maley. “If the group can regain its footing and rally back towards its high years, this will turn out to be a pretty bullish development and I can become more optimistic.”

Over the past year, investors have contributed almost 370 MUSD to XLF. Despite the Trump administration taking steps to lift some of the more demanding regulatory burdens in the banking sector following the financial downturn, The legal reforms have not yet led to higher returns for bank ETFs.

Financial Select Sector SPDR (NYSEArca: XLF)