What Is Bothering Global Financial ETFs?

By | February 17, 2016

Scalper1 News

The global financial sector has been under stress lately. The crash was mainly brought about by the European banks, which have shed a quarter of their market value so far this year and are running the risk of further losses. While the long-standing woes in the energy sector and the Chinese economy were already there to spoil the financial market sentiments, the latest sell-off in banking stocks was spurred by UBS Group AG’s (NYSE: UBS ) moderate earnings for the fourth quarter of 2015. The bank’s outlook was more worrisome as it indicated several macroeconomic headwinds and geopolitical issues that would bother operations in the near term. UBS talked about ” very low levels of client activity and pronounced risk aversion.” The bank reported 3.4 billion Swiss francs ($3.3 billion) of outflows from its wealth management division. All in all, fears of a broad-based global slowdown spooked investors, who rushed to dump banking stocks. This was because of the fact that a slowing global economy means reduced capital market activity, lower loan growth and high chances of credit default, especially from the energy sector. All these stirred speculation about a global banking sector meltdown. If this was not enough, negative interest rates have been playing foul in the European banking sector and may also leave a scar on the Japanese banking sector. Central banks of both regions are presently pursuing negative deposit rates. Such rock-bottom interest rates dent banks’ net interest margins. The apprehension was so quivering that “in its annual stress test for 2016, the Fed said it will assess the resilience of big banks to a number of possible situations, including one where the rate on the three-month U.S. Treasury bill stays below zero for a prolonged period,” per Bloomberg . In the stress test, banks need to tackle three-month bill rates going into the negative zone in the second quarter of 2016, then falling to negative 0.5% and finally staying there till the first quarter of 2019. Outflow from Financials ETFs The Bloomberg World Banks Index has lost over 16% year to date (as of February 9, 2016). As risks over the space are front and centre, investors are dumping financial ETFs at the fastest rate since 2010 . Global financial ETFs have seen assets worth $3.17 billion gushing out so far this quarter. As per Markit, global financial ETFs are on the way to record the “worst quarterly outflow in six years since the second quarter of 2010″. iShares Global Financials ETF (NYSEARCA: IXG ) The $212 million ETF holds 236 stocks in its portfolio. No stock accounts for more than 4.46% of the portfolio. Banking is the fund’s topmost priority, with about 46.5% focus, followed by insurance (20%) and diversified financials (19.4%). As far as geographical focus is concerned, the U.S. is the fund’s top sector, with about 47.4% exposure, while the UK (7.7%), Australia (7.2%), Japan (6.4%) and Canada (6.14%) also hold considerable exposure each. The fund charges 48 bps in fees and is down 17.1% so far this year (as of February 10, 2016). SPDR S&P International Financial Sector ETF (NYSEARCA: IPF ) IPF invests $6.4 million in assets in 199 stocks. Japan, the UK, Canada and Australia get double-digit weights in the fund. Banks (46.3%) and insurance (22.2%) have considerable weights in the fund. No stock accounts for more than 3.49% of the portfolio. It is off 20.2% so far this year (as of February 10, 2016). Bottom Line Having described the crisis, we would like to note that the fear of a 2008-like recession or financial market crash is less likely. The negative interest rates should boost capital market activities in the eurozone and Japan and benefit banks in other ways. As far as the U.S. is concerned, a negative interest rate is less likely to be a near-term option, though the Fed chief does not ” take those off the table .” The U.S. economy may be slowing from the end of 2015, but is not so feeble that it needs to undergo a negative interest rate policy at the current level. So, one can consider the recent sharp sell-off as more panic-induced, and banks’ stocks probably do not deserve such a beating as they are currently going through. Original Post Scalper1 News

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