Financials ETF Flows Another Signal Bank Earnings Didn't Impress

(Bloomberg) -- Bank earnings have been record-breakingly good, but not good enough to excite exchange-traded fund investors.

The largest ETF tracking the banking industry, State Street Corp.’s Financial Select Sector SPDR Fund, known by its ticker XLF, had $460 million yanked from its coffers Wednesday. It was the fund’s largest single-day loss since January, and it follows two days of outflows while the six largest U.S. banks posted strong results.

“There’s definitely significant pessimism on the part of some investors that the banks will be able to continue this performance,” said Chris Zaccarelli, chief investment officer of Independent Advisor Alliance, which manages $2.5 billion. “Some of the selloff may be due less to concerns about the actual results, which I thought were excellent, but more of a skepticism that this can continue. Some people think we’re seeing some peak earnings.”

Through Wednesday, JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley had all reported earnings. Combined, the firms generated more than $30 billion in income for the first time ever. In addition, revenue from trading notched the highest mark in three years as volatility returned to markets.

Still, bank stocks couldn’t hold onto any gains.

Financials were up 1.4 percent as of 11:50 a.m. in New York Thursday, one of only two sectors registering gains, as American Express Co. posted strong results and an improved outlook. In addition, yields on benchmark 10-year Treasuries rose above 2.9 percent for the first time since February.

To some investors, the recent weakness in bank stocks despite the stellar earnings presents an opportunity.

“With yields moving higher, strong capitalization ratios and an even more accommodative regulatory environment, I do view this earnings-related bank weakness as an entry point for medium/longer-term investors who need to add some higher rate exposure,” Tom Essaye, the former Merrill Lynch trader who founded the market newsletter ‘The Sevens Report,’ wrote to clients Thursday.

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