April 5, 2019

Financial Services Funds Continue to Suffer Net Outflows

by Pat Keon, CFA.

After experiencing their worst quarterly net outflows ever in Q4 2018 (-$10.1 billion), financial services funds have continued to shed assets in 2019. The group’s net negative flows in Q1 (-$4.2 billion) were the third largest in their history, and the trend has continued in Q2 as they saw $728 million in assets leave their coffers during the first week of trading. Heading into Q2, financial services funds have experienced four straight quarters of net negative flows, for total net outflows of $16.6 billion.

Financial services stocks (and, therefore, financial services funds) have struggled as of late due to concerns about a global economic downturn. A specific negative for the financial sector (banks in particular) has been the change in the Federal Reserve’s stance on raising interest rates. Higher interest rates are good for banks because it translates into banks being able to earn more on the money they lend out. The Fed recently confirmed it will not be raising rates this year, and the financial services sector has also had to contend with the idea the Trump Administration is pushing that the Fed should cut interest rates.

The lion’s share of the net outflows for financial services funds in Q1 (-$3.8 billion) and Q4 2018 (-$9.5 billion) came from ETFs. Financial Select Sector SPDR Fund (XLF) was responsible for the largest individual net outflows in both Q4 (-$4.6 billion) and Q1 (-$2.6 billion). The next largest net outflow in Q4 belonged to SPDR S&P Regional Banking ETF (KRE, -$1.1 billion), while second place in Q1 went to SPDR S&P Bank ETF (KBE, -$723 million). For the mutual fund side of the ledger, the largest net negative flows were attributable to Vanguard Financials Index Fund (-$1.0 billion) and John Hancock Regional Bank Fund (-$116.4 million) in Q4 and Q1, respectively.



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