ETF Investors Hasten Financials Exodus as December Slump Deepens

(Bloomberg) -- Investors are fleeing the largest exchange-traded fund tracking U.S. financial stocks at the fastest monthly pace on record, having withdrawn more than $3.5 billion from it through Dec. 24.

Outflows from the $21 billion Financial Select SPDR Fund, or XLF, are driving the record $9.2 billion that’s been pulled from all ETFs tracking financials this year. Traders have also been closing out their bets in the $2.7 billion SPDR S&P Regional Banking ETF, which tracks an equal-weighted portfolio of banks stocks. XLF is more diversified, with 49 percent of its holdings in banks, and about 32 percent in insurance companies.

Financials are the worst performing among 11 S&P 500 industry groups in December, falling 16 percent in the midst of pressures ranging from disappointing loan growth to a flattening yield curve to slowing global growth. The KBW Bank Index is down 19 percent this month and is on track for a 21 percent decline this quarter, which would be its worst since a 27 percent decline in the three months ended September 2011.

As of Monday, XLF had logged almost three weeks of lower consecutive closing days, said Josh Lukeman, head of ETF market making for the Americas at Credit Suisse Group AG.

“You’d have to go back to the beginning of 2016 to find a similar free-fall,” he said. “With the Street worried about a flattening yield curve among other things lately, and what an inversion could mean for the economy in the future, the financials and XLF have borne the brunt of relentless selling pressure.”

The weakness in banks comes amid a broader market rout that’s seen waves of selling chop $5 trillion off U.S. equity values in three months. In an attempt to reassure markets, Treasury Secretary Steven Mnuchin called executives from the six largest U.S. banks over the weekend to confirm that they have liquidity available for lending to consumers.

To contact the reporters on this story: Vildana Hajric in New York at vhajric1@bloomberg.net;Carolina Wilson in New York City at cwilson166@bloomberg.net

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, Richard Richtmyer, Scott Schnipper

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