Financial Industry ETFs Slump as Banks Report Mixed 4Q Earnings

January 19, 2023

Exchange-traded funds that focus on banks and asset managers are tumbling after a week of weak earnings and warnings of impending economic headwinds.  

Shares of three of the largest ETFs tracking the financial sector—the Financial Select Sector SPDR Fund (XLF), the Vanguard Financials ETF (VFH) and the Fidelity MSCI Financials Index ETF (FNCL)—all dipped 1.2% on Thursday after posting consecutive losses during the week.  

 

Rough Ride for XLF, VFH, FNCL 

Source: Bloomberg 

 

Large asset managers reported a mix of fourth-quarter earnings results. JPMorgan Chase & Co., Bank of America Corp. and Charles Schwab Corp. boasted year-over-year revenue increases as balance sheets were buoyed by net interest income.  

Other firms fared less well: Revenue at BlackRock Inc., the world’s biggest ETF issuer, plummeted 18% year over year, and Goldman Sachs Inc. posted its largest earnings miss in a decade. All five companies are within the top 10 holdings in XLF, VFH and FNCL.  

Still, executives are cautioning of a coming economic downturn, despite stocks bouncing back after 2022’s double-digit declines.  

“We still do not know the ultimate effect of the headwinds coming from geopolitical tensions,” JPMorgan CEO Jamie Dimon said during the bank’s fourth-quarter earnings call last week. He listed impediments to growth such as “war in Ukraine, the vulnerable state of energy and food supplies, persistent inflation that is eroding purchasing power and has pushed interest rates higher, and the unprecedented quantitative tightening.”  

In preparation, banks are bolstering loan loss provisions, cash reserves that banks set aside to cover problem loans that are unlikely to see repayment.  

Bank of America, the second largest bank in the U.S., has set aside $403 million to cover possible bad loans, with CEO Brian Moynihan alluding to an "increasingly slowing economic environment” during the firm’s quarterly earnings call with analysts and investors.   

Meanwhile, Larry Fink, CEO of of iShares’ parent BlackRock, in this week’s fourth-quarter earnings call predicted a coming “economic malaise.”    

 

Contact Shubham Saharanat[email protected]       

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