A Bearish Bank ETF


A flattening yield curve and diminishing expectations that the Federal Reserve will be able to raise interest rates multiple times this year are among the factors dragging on U.S. bank stocks and the relevant exchange-traded funds.

If higher interest rates really are efficacious for bank stocks, then it is not surprising that European banks are being pinched. After all, the eurozone is home to negative interest rates. So is Switzerland. Nordic countries have employed negative rates as well; just look at Denmark and Sweden.

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None of that is good for the iShares MSCI Europe Fincls Sctr Indx Fd (NASDAQ:EUFN), an ETF that was highlighted in this space late last month as being vulnerable to further retrenchment. Just seven weeks into 2016, EUFN is already in a bear market, with a year-to-date loss of about 20.5 percent.

Claws Out And Poised For A Downward Swipe

EUFN's recent woes could be an ominous harbinger of things to come when considering an interesting statistic. In recent weeks, Deutsche Bank AG (USA) (NYSE:DB) and Credit Suisse Group AG (ADR) (NYSE:CS) have been among the most embattled European banks.

However, the German and Swiss banking giants are not major players in EUFN's 101-stock lineup. Credit Suisse and Deutsche Bank for just over 3 percent of the ETF's weight despite the fact that Switzerland and Germany are EUFN's third- and fourth-largest geographic weights, respectively. The two countries combine for 24 percent of the ETF's weight.

ETF investors seem to have no appetite to call the bottom of this trend as the 73 financial ETFs listed in Europe have seen significant outflows since the start of the year, with net withdraws approaching the $1bn mark year to date. This already outpaces the previous largest quarterly outflow of $1.1bn, seen in Q3 2011 when fears of financial contagion gripped European markets, said Markit in a new note. The recent outflow combined with poor price performance means that the AUM from these funds has shrunk by over $2 billion, over 15 percent of last years year end total.

Those data points pertain to financial services ETFs trading in Europe. In the United States, EUFN has lost $20.1 million year-to-date, bringing its assets under management tally to $230.5 million.

Is Italy The Next Greece?

Credit default swaps on debt of Italian bank Monte de Paschi have recently surged, leading some investors to ponder whether Italy, the eurozone's third-largest economy, could become the region's next Greece. Morgan Stanley recently highlighted the under-performance of European banks relative to the region's inflation expectations.

Investor sentiment is not uniformly pessimistic sector wide, as short selling across European banking firms has continued to stay below that seen in the wider market. Banking shares now see 1.5 percent of their shares out on loan on average, one-third less of that of the average for Stoxx 600 constituents which stands at 2.6 percent, added Markit.

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