Are Bank ETFs Finally Turning Around?

| About: SPDR S&P (KBE)

Financial stocks leading the recent market bounce and Warren Buffett’s $5 billion investment in Bank of America (NYSE: BAC) have triggered talk that bank exchange traded funds have finally hit bottom.

SPDR KBW Bank ETF (NYSEArca: KBE) is up 8.5% over the past week, roughly doubling the return of the S&P 500.

“Maybe the strongest evidence that the market hit bottom earlier this month comes, ironically, from the financial sector — the very sector whose weakness earlier in the year foreshadowed the overall market’s imminent trouble,” writes Mark Hulbert for MarketWatch. “Now, however, it’s the financial sector’s turn to lead the market higher.”

Still, the bank ETF is one of the worst sector performers over the past month with a decline of about 14%, and is down more than 20% year to date.

Financial stocks have recovered somewhat the past week on hopes the economic outlook isn’t as bleak as many bears predict. Speculation of further stimulus from the Federal Reserve has also brightened sentiment on the troubled sector.

Since February 2007, financials are the worst-performing sector with a 66% decline, according to Crossing Wall Street.

“As confidence in the broader economy continues to erode, bank stocks have been hit particularly hard. The recent plunge in the Philly Fed manufacturing index and ISM indices in July, expectations for floundering job creation and further pressure on asset values, together with renewed concerns over Europe, have each served to pressure sector valuations to levels not seen since 2009 when serious doubts surrounding the health of bank balance sheets took center stage,” wrote Sterne Agee analysts in a recent note on the sector.

“However, bank balance sheets today are generally sound and the strongest they’ve ever been at the potential onset of any recession,” they added. “To be sure, current valuations are far removed from underlying fundamentals today; however, bank equities are clearly discounting the potential for a recession and a protracted period of zero growth for the next few years.”


Max Chen contributed to this article.