Why Financial ETFs Rose Last Week

Financial ETFs gained last week

Market sentiments turned positive last week after the rebound in oil prices indicated that investors might be easing up their bearish outlook. The S&P 500 Index (SPY) gained 2.9% during the week led by gains in technology and consumer discretionary stocks.

The Financial Select Sector SPDR ETF (XLF), which invests primarily in banks, gained 6.7% during the trailing five days, led by gains in Genworth Financial (GNW), Navient (NAVI), and Lincoln National (LNC). These stocks rose by 19.9%, 18%, and 16.8% during the trailing five days ending on Friday. Further, the Federal Open Market Committee minutes released last week suggested a cautious outlook for 2016. Most Fed officials saw increased downside risk and agreed that “uncertainty” had increased.

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Weakness in the financial sector is evident all over the world. Fourth quarter bank earnings have been dismal, and a low margin outlook along with falling commodity prices have led to further worries of credit losses for the sector. Plus, Janet Yellen, chair of the Federal Reserve, indicated that the Fed would stay away from its plan to hike interest rates in 2016 if current market conditions prevail. Lower long-term interest rates reduce the earning power of banks. The Financial Select Sector SPDR ETF (XLF), which serves as a barometer for US financial stocks, has plunged 11% in 2016 so far.

The XLF ETF closed at $20.98 on February 19, up 6.7% in the trailing five days. In comparison, the Vanguard Financials ETF (VFH) and the iShares Financials ETF (IYF) generated returns of 6.5% and 6.3%, respectively, during the same period.