Financial Services ETFs Searching For Momentum

More than halfway through 2016, investors are likely tired of hearing about the struggles of the financial services sector and the relevant exchange-traded funds. The Financial Select Sector SPDR Fund XLF, the largest ETF tracking the S&P 500's second-largest sector weight, is down 6 percent year-to-date.

Arguably the most obvious issue plaguing XLF and other financial services ETFs is the Federal Reserve's refusal to boost interest rates. However, the Fed recently provided some good news for XLF and friends.

Change On The Horizon

“Direct and indirect investors in bank stocks, which are widely held among various financial ETFs, last week gave shareholders some rare good news for 2016. With the release of the Federal Reserve's Comprehensive Capital Analysis and Review (CCAR), the largest U.S. banks announced higher returns of capital in the form of dividends and share repurchase plans. The actions should help to offset the negative impact of less aggressive Federal Reserve action in raising interest rates, relatively low oil prices causing credit market stress and the impact of the Brexit vote,” said S&P Capital IQ in a note out Monday.

Related Link: A New Look Is Coming For XLF

The results of the Fed's CCAR open the door for XLF holdings to increase dividends and buybacks, an important factor when considering many XLF's holdings, although sources of dividend growth in recent years, still sport payouts below those seen prior to the financial crisis.

While the dividend and buyback news is increasingly positive for the financial services sector, interest rates remain a concern.

Take A Closer Look At KRE

Just look at the SPDR KBW Regional Banking (ETF) KRE. KRE, the largest regional bank ETF, is one of the most rate-sensitive sector or industry ETFs on the market and is down 12 percent this year as the Fed continues dithering on rate hikes.

“Meanwhile, KRE, which has $1.7 billion in assets, holds only regional bank securities and benefits from the corporate actions of companies in that investment style,” said S&P Capital IQ. “Year to date through June 30, XLF had $3.4 billion in outflows, the most of any of the Select Sector SPDRs. KRE and the SPDR KBW Bank (ETF) KBE had net withdrawals if $700 million and $338 million, respectively in 2016.”

While July is typically viewed as a lethargic month on Wall Street, the time could be right to consider XLF because, on a historical basis, the ETF is one of the best sector SPDR ETFs in the month of July.

Disclosure: Todd Shriber owns shares of XLF.