Why Did Financial ETFs Rise Last Week?

US markets gain as oil prices rebound

Market sentiment turned positive last week after oil prices rebounded. It indicated that investors might be easing up their bearish outlook. The S&P 500 Index (SPY) rose 1.6% during the week. The Financial Select Sector SPDR ETF (XLF), which invests primarily in banks, rose 1.6% last week. It was led by Genworth Financial (GNW), Weyerhaeuser (WY), and E*Trade Financial (ETFC), which rose 12.9%, 11.9%, and 7.8%, respectively, during the trailing five days that ended on Friday, February 26, 2016. That day, GDP (gross domestic product) numbers for 4Q15 were revised upward, suggesting that economic growth is not as bleak as we thought.

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Weakness in the financial sector is being witnessed around the globe. Fourth quarter bank earnings have been dismal, and a low margin outlook and falling commodity prices have led to further worries of credit losses for the sector.

Janet Yellen, chair of the Federal Reserve, indicated that the Fed would stay away from its plan of hiking interest rates in 2016 if current Market conditions prevail. Global economic worries and turbulence in world stock markets have pushed up prices of US government bonds as investors seek safety. This has depressed yields on bonds, which determine mortgage rates.

Lower long-term interest rates reduce earning power for banks. The Financial Select Sector SPDR ETF (XLF), which serves as a barometer for US financial stocks, has fallen 10.5% so far in 2016.

XLF closed at $21.32 on February 26, up 1.6% in the trailing five days. In comparison, the Vanguard Financials ETF (VFH) and the iShares Financials ETF (IYF) generated returns of 1.7% and 1.7%, respectively, during the same period.

Read on to the next part to see why small-caps outperformed large-caps last week.