Banking ETFs on both sides of the Atlantic have endured a tough start to 2024 as the US commercial real estate sector continues to face mounting pressure.
US Treasury Secretary Janet Yellen said she was “concerned” about the sector last week – with falling valuations pushing up losses among lenders – while banks in the US, Japan and Europe have all warned on the exposure to commercial real estate and wider contagion fears.
Despite the strong economic data coming from the US, commercial real estate globally has failed to recover following the onset of COVID-19 while higher interest rates are impacting many borrowers' ability to refinance.
European finance ETFs led the losses last week, with the Invesco European Banks Sector UCITS ETF (X7PP) and the Amundi Euro Stoxx Banks UCITS ETF (BNKE) both falling 2.8%, respectively.
Meanwhile, the Xtrackers MSCI USA Banks UCITS ETF (XUFB) was down 1.8% and the iShares S&P U.S. Banks UCITS ETF (BNKS) fell 1.5%, taking the latter’s year-to-date performance to -4.4%.
The concerns have also compounded real estate ETFs' poor start to the year.
The mounting pressure on the real estate sector has led to fears of another regional banking crisis in the US, similar to the collapse of lender US Silicon Valley Bank (SVB) last March.
Europe’s largest ETF tracking the sector, the $742m Xtrackers FTSE EPRA/NAREIT Developed Europe Real Estate UCITS ETF (XDER), is down 10.5% since the turn of the year while the Invesco US Real Estate Sector UCITS ETF (XREP) has fallen 5%.
Despite this, some are anticipating conditions might get easier for the sector if the Federal Reserve decides to cut rates this year.
Claudio Irigoyen, head of global economics at Bank of America (BofA), said: “Easier financial conditions compared to a quarter ago and the expectation for the Fed to begin cutting rates around the middle of this year should also provide some relief.
“However, the sector is likely to remain strained as elevated office vacancies and lower prices are expected to persist in this post-pandemic world.”
