Financial ETFs May Be Hit By Slim Bank Profits

Nearly two years after the unfolding of the global financial crisis, U.S. financial companies are struggling to grow revenue streams and are witnessing increased operating costs, resulting in slimmer profits which could lead to slimmer returns for the Financial Select Sector SPDR (XLF), the iShares Dow Jones US Financial Sector Index Fund (IYF), the Vanguard Financials ETF (VFH) and the KBW Bank ETF (KBE).

According to Bradley Keoun of Businessweek, first-half operating expenses at the six largest U.S. financial companies increased by $7.92 billion, or 5.9 percent over the same period last year, while revenues decreased by $5.6 billion or 2.2 percent.  It’s not hard to see that revenues are not keeping up with expenditures and this imbalance will eventually erode profit margins. 

In fact, JP Morgan Chase (JPM), one of the six largest U.S. financial companies, recently reported that its expenses jumped 7 percent from a year earlier while its revenue dropped 11 percent.  The same tune was heard from Citigroup which announced that its first half operating costs dropped by 1.3 percent from a year earlier while its revenue plummeted by 13 percent.  Similar trends are expected to be announced by Bank of America (BAC) and Wells Fargo (WFC), both of which are expected to release third-quarter earnings reports next week.

At the end of the day, large U.S. financial institutions are starting to feel the pain of a shrinking loan business, caps on credit-card fees and overdraft charges and a ban on proprietary trading-all areas that were large revenue generators.  The aforementioned ETFs will likely be influenced due to their heavy asset allocations to the largest U.S. financial institutions.

  • the Financial Select Sector SPDR (XLF), allocates 9.56% of its assets to JP Morgan Chase, 8.11% to Wells Fargo, 8.09% to Bank of America and 6.01% to Citigroup
  • the iShares Dow Jones US Financial Sector Index Fund (IYF), allocates 7.85% of its assets to JP Morgan Chase, 6.72% to Bank of America, 6.41% to Wells Fargo and 4.89% to Citigroup
  • the Vanguard Financials ETF (VFH), allocates 8.96% of its assets to JP Morgan Chase, 7.95% to Bank of America, 6.7% to Wells Fargo and 4.22% to Citigroup
  • the KBW Bank ETF (KBE), allocates 10.48% to Citigroup, 8.57% to JP Morgan Chase, 7.81% to Bank of America and 6.41% to Wells Fargo.

Disclosure: No Positions

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