Can Select Sector Financial SlctStr SPDR Fd (NYSEARCA:XLF) Outperform Ahead Of Fed Meeting?

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Financial stocks have been believed as the cure to deal with rising interest rates. Despite this popularity, Select Sector Financial SlctStr SPDR Fd (NYSEARCA:XLF) has been stuck in sideways performance since the beginning of 2015. It recorded a net negative return of -0.61% in the first half of 2015 and has failed to record promising price action to live up its reputation.

The details

Select Sector Financial has succeeded in remaining in focus just because it is a part of financial centric group, which comprises brokerages, REITs, large banks and diversified holding firms such as Berkshire Hathaway. REITs are presently the third largest industry set within XLF at more than 14% and have negatively affected returns since the start of this year. The iShares U.S. Real Estate exchange-traded funds has shown a similar interest rate sensitive decline as utility stocks and has plunged 5.5% in 2015.

Contrariwise, indexes focused solely on banking shares like the SPDR S&P Bank ETF has jumped more than 8% this year. Clearly banking stocks are the real beneficiaries of the increasing interest rate concept as it connects to a central driver of industry returns. Eventually, Select Sector appears to be witnessing its own internal conflict based on thesplit between sub-sectors that has triggered it to drift meaninglessly for the last six months.

The expectations

Investors expecting that financial services shares will flourish in a rising rates environment would make it sure to bet on KRE compared to other diverse Exchange-traded funds tracking the sector. In the last two year, KRE’s sensitivity to fundamental changes in ten-year Treasury yields stands at 0.24, or almost double compared to the Select Sector Financial. It is surprising as latter is believed to be the largest financial services exchange-traded funds in the respective industry. The financial market and its associated banking sectors react positively to rising interest rates.

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