A Curious Trend With Bank ETFs

The Financial Select Sector SPDR Fund XLF, the largest exchange-traded fund tracking stocks in the S&P 500's third-largest sector, lost 1.56% last week. With interest rates declining, some market observers are forecasting more weakness for bank stocks.

What Happened

While second-quarter earnings reports were mostly strong in the financial services sectors, plenty of banks, including some marquee XLF components, served up lower full-year net interest margin guidance, forecasting that a more dovish Federal Reserve is likely to pinch the financial sector.

“All 24 stocks in the KBW Bank Index have slumped since last Friday on concern that lower interest rates will squeeze profits,” reports Bloomberg. “Traders have yanked more than $1.5 billion from all U.S.-listed exchange-traded funds tracking the financial sector in the week through Aug. 8, the fastest pace this year, according to data compiled by Bloomberg.”

Why It's Important

While XLF is on an eight-day skid that has seen the fund shed $3 billion in assets, that doesn't mean traders are flocking to inverse leveraged financial ETFs, such as the Direxion Daily Financial Bear 3X Shares FAZ. Indeed, FAZ is rallying, but the ETF, which looks to deliver triple the daily inverse returns of the Russell 1000 Financial Services Index, is also seeing steady outflows.

For the 10 days ending Thursday, Aug. 8, the bearish FAZ saw outflows of $16.4 million, according to issuer data. That was good for the sixth-highest outflows total during that period among all Direxion leveraged ETFs.

But with bank stocks faltering, traders aren't taking chances with the Direxion Daily Financial Bull 3X Shares FAS, the bullish counterpart to FAZ. During those same 10 days, FAS saw $29.5 million worth of departures.

What's Next

It is not a guarantee, but one of the outflows trends for FAS and FAZ are bound to end. Either investors will see value in the defensive, no China exposure offered by domestic banks or they will embrace the idea that shorting bank stocks is the path of least resistance over the near-term.

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Todd Shriber owns shares of XLF.