Reasons To Consider This Out Of Favor Sector's ETFs

Two things are abundantly clear about the financial services sector and its corresponding exchange-traded funds this year. First, the sector is the second worst performer in the S&P 500 behind healthcare. Second, the Federal Reserve is catching plenty of flak for the financial services sector's woes.

It is not just the Fed that is hurting financial services stocks and ETFs. Low energy prices are still seen as problematic for some mid-tier and smaller regional banks with big exposure to energy loans. Capital markets activity has been lethargic this year. Combine that with the Fed's ongoing dithering with interest rates and it is not surprising that ETFs like the SPDR KBW Bank (ETF) KBE are struggling.

KBE

The $2.28 billion KBE is down nearly 10 percent year-to-date. Some financial services ETFs are better. Sort of. Plenty are worse. With bank ETFs ensconced in controversy and laggard performances, investors are understandably leery, but it is times like these where there could be profits to be made for risk-tolerant investors.

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The sector's fundamentals are decent and while the group's price action is weak, the Fed's reluctance to raise interest rates does not equal a redux of the global financial crisis.

“The banking sector has fundamentally changed since the global financial crisis and bank stock fundamentals have strengthened. We have not seen the signs of stress among collateralized debt obligations and credit default swaps that were apparent in past crises. And unless we head into a major US or European recession, we do not see a balance sheet issue for the sector,” according to a recent State Street note.

Personifying KBE

For its part, KBE, if an ETF could express emotion, would really like to see interest rates rise. While it is not billed as a regional bank ETF, KBE devotes 73.7 percent of its weight to rate-sensitive regional banks. The ETF's includes some of Warren Buffett's favorite banks, such as the M&T Bank Corporation MTB and U.S. Bancorp USB.

For the investor willing to look long term, as Buffett often does, KBE could be a winner.

“We view falling bank and financial stock prices earlier in the year as an overreaction to broader market concerns and therefore an opportunity to buy select financials in the US and Europe at price levels that tend to be consistent with attractive, long-term returns,” added State Street.