Financial sector has underperformed last week with
Financial Select Sector SPDR (and XLF Quick Quote XLF - Free Report) Invesco KBW Bank (losing about 2% and 0.5%, respectively while the tech-heavy Nasdaq was up about 0.5%. The pain in the financial sector mainly emanated from the subdued earnings. Three out of six big U.S. banks were able to beat overall and the rest three put up mixed performance (read: KBWB Quick Quote KBWB - Free Report) Financial ETFs Down on Mixed Earnings).
The fourth quarter earnings season for the S&P 500 is not off to a great start. To date, the number and magnitude of positive earnings surprises reported by S&P 500 companies are below their 5-year and 10-year averages. Negative earnings surprises and downward revisions to earnings estimates for companies in the Financial sector have been the largest provider of the increase in the overall earnings decline for the S&P 500 index over the past week and since December 31,
Bank or financial stocks perform better in a steepening yield curve environment. As on Jan 20, 2023, the spread between 10-to-2-year U.S. yield curve was negative 0.66%. At the start of the week, the spread was negative 0.73%. Though yield curve is steepening this year due to higher chances slower Fed rate hikes in the coming days and the gradual comeback of the risk-on trade sentiments, banking stocks have been underperforming due to higher recessionary fears.
kept aside around $4 billion for a likely recession. JPMorgan (JPM) set aside $1.85 billion in provisions for credit losses. Bank of America (BAC) set aside $1.1 billion for credit losses in the fourth quarter, Wells Fargo (WFC) $936 million, and Citigroup (C) another $640 million. Economists predict that there is a 61% chances for a recession in 2023, according to the Wall Street Journal survey, quoted on businessinsider.in. The predicted likelihood declined 2% from October, but remains historically high.
The Fed is likely to keep short-term rates at 5% level this year while long-term rates are likely to decline if recession strikes. This would fatten the yield curve and lower banks’ net interest margin. Hence, financial stocks probably started to underperform (read:
ETFs to Tap If Rates Remain Above 5% for "A Long Time").
Against this backdrop, many may consider shorting financial sector with the following funds.
ETFs in Focus ProShares Short Financials ( SEF Quick Quote SEF - Free Report) – Up 1.5.% last week
The ProShares Short Financials seeks daily investment results, before fees and expenses, that correspond to the inverse of the daily performance of the Dow Jones U.S. Financials Index. The fund charges 95 bps in fees.
ProShares UltraShort Financials ( SKF Quick Quote SKF - Free Report) – Up 2.9% last week
The ProShares UltraShort Financials seeks daily investment results, before fees and expenses that correspond to two times the inverse of the daily performance of the Dow Jones U.S. Financials Index. The fund charges 95 bps in fees.
MicroSectors U.S. Big Banks Index -3X Inverse Leveraged ETNs ( BNKD Quick Quote BNKD - Free Report) – Up 7.6% last week
The MicroSectors U.S. Big Banks Index -3X Inverse Leveraged ETN is linked to a three times inverse leveraged participation the performance of the Solactive Microsectors U.S. Big Banks Index. The index is an equal-dollar weighted index and seeks to provide exposure to the 10 largest U.S. banks and financial services companies. The note charges 95 bps in fees.