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Following the taper postponement by Bernanke and company, it has been a pretty rough couple of days for the financial sector. While it is true that many top names in the space jumped following the initial report, an environment of a tight yield spread is by no means welcomed for many players in the industry.
If this was the only negative issue impacting financials, many would easily be able to endure the pain. However, a recent report from Citigroup (C - Analyst Report) has called into question just how stable these firms might be in the earnings season ahead (see all the financial ETFs here).
The company fell almost 3.2% on the session as it reported that their interest-rate and currency businesses may lead to an overall bond-trading revenue slump. Analysts have already begun to slash their earnings projections for the company based on this news, though better equity trading could help to alleviate some of the issues. Still, a double digit revenue plunge is not out of the question for the company, which is reporting earnings in a little less than a month.
This news led to some modest losses for a number of companies in the space too, sending industry share prices down several percentage points on the session. In particular though, the following financial sector ETFs were the hardest hit by the news and could be ones to watch for weakness this earnings season:
PowerShares KBW Bank Portfolio (KBWB - ETF report)
This ETF follows the KBW Bank Index, giving cap weighted exposure to a portfolio of about two dozen financial stocks. The ETF sees decent volume of about 200,000 shares a day, while the assets under management come in just over $150 million.
In terms of holdings, the in-focus Citigroup makes up the top spot at just over 9.3%, followed closely by (BAC - Analyst Report) and (JPM - Analyst Report) to round out the top three. Large caps do dominate the fund at roughly 80% of the total assets, while the portfolio definitely has a value tilt (See Top Ranked Financial ETF KBWB in Focus).
KBWB has had a rough couple of days, losing roughly 2.6% in the trailing five day period.
iShares U.S. Financial Services ETF (IYG - ETF report)
For a slightly more popular choice in the space, investors have IYG, a product that follows the Dow Jones US Financial Services Index. This benchmark provides exposure to just over 100 stocks, and it has good volume of about 100,000 shares a day, along with AUM of just over $600 million.
Citigroup takes the third spot in terms of assets at 8.2%, trailing JPM and WFC which both posses more than 10.5% of the total. This fund actually has an even more extreme focus on large caps—nearly 90% of the portfolio—while more of the fund is in its top ten holdings, just eclipsing the 60% mark for this figure.
In terms of performance, this fund is down about 1.25% in the trailing five day period.
RevenueShares Financial Sector Fund (RWW - ETF report)
For a slightly different approach to the financial sector, investors may want to consider this revenue-weighted ETF, RWW. The product tracks the RevenueShares Financial Sector Index, a benchmark that gives exposure to about 80 stocks that are weighted by revenues instead of market capitalization (read 3 Top Ranked Financial ETFs to Buy Now).
Citigroup takes the fourth spot in this ETF, edging out others at 6.3% of the total. Meanwhile, Berkshire, JPM, and BAC take the top three spots ahead of C, suggesting a large cap focus once again.
Investors should note that this ETF has a bit of an insurance focus (33%), so it may hold up better at earnings season. However, these companies have been hit by the ‘no taper’ announcement as well, helping to push this ETF down about 1.6% in the past five trading days.
Citi’s expected weakness isn’t great news for the other big banks in the sector. These companies need solid trading revenues to power profits, and such a huge reduction in fixed income trading isn’t a good harbinger of things to come (see The Best ETFs in the Market’s Top Sector).
Given this, we could see some significant weakness in a number of other banks—and thus a variety of financial ETFs—heading into earnings season. And since these companies have been leading the market for the past few months, weakness may derail some of the stock market’s recovery, suggesting the aforementioned ETFs—and big bank trading—should be watched closely this earnings season by investors.
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