Financials drop 2.4% after the Fed's first hike since 2023 and a Bank of America fee warning
The Financial Select Sector SPDR ETF fell 2.4% in the week ended Friday, September 18, 2026, as the Fed raised rates to 3.75%–4.00% and the 10-year yield closed at 5.01%.
Bank of America fell 7.9% and Goldman Sachs 8.5% between Friday, September 11, and Friday, September 18. Higher policy rates are supposed to fatten a lender's margin. This week they showed up first as weaker deal fees and a markdown on the bond portfolios already on the books. How much a holder lost depended on the wrapper: 4.9% in the large U.S. bank fund KBWB, 1.6% in the regional-bank fund KRE, 0.6% in the U.S. insurance fund KIE. The S&P 500 fund SPY finished the week down 0.09%.
The selling in the Financial Select Sector SPDR ETF XLF did not wait for the Federal Reserve. It started Monday, when Bank of America Chief Executive Brian Moynihan told a Barclays conference that third-quarter investment-banking fees would come in more than 10% below a year earlier and that sales and trading would be roughly flat.
The Fed hiked into a 5% 10-year
On Wednesday the Federal Open Market Committee voted 12-0 to raise the federal-funds target by a quarter point to 3.75%–4.00%, its first increase since 2023. The statement said inflation remains elevated and that the move would support a timelier return to the 2% goal. "The plain fact is that inflation is too high and has been for too long," Chair Kevin Warsh said. The committee's median projection for the end of 2026 is 4.1%.
The 10-year Treasury yield finished Friday at 5.01%, five basis points above the 4.96% of September 11, after slipping to 4.94% on Thursday and climbing back. The 2-year yield rose more, from 4.63% to 4.76%. That flattened the 2-year/10-year spread from 0.33 percentage point to 0.25. A bear flattening is not the curve a bank treasurer draws on a slide: loan yields tied to the long end barely moved, while the rate that sets wholesale funding and, with a lag, deposit costs jumped 13 basis points.
XLF fell 1.6% on the decision day alone, to $55.93, and drifted to $55.86 by Friday. It is 4.7% below its 52-week high of $58.60.
Money-center banks, not regionals
Bank of America, Goldman Sachs, JPMorgan Chase, and Morgan Stanley accounted for 1.1 percentage points of XLF's decline, or 44% of the move, using Friday's weights against the week's price changes. JPMorgan, the fund's largest holding at 11.9%, fell only 1.8%. Wells Fargo dropped 4.6% and Citigroup 5.1%. Visa and Mastercard, 13.6% of the fund together, were little changed.
The 4.9% week in KBWB came from a 26-stock book of large U.S. banks with JPMorgan, Bank of America, Wells Fargo, Morgan Stanley, and Goldman Sachs as its top five. KRE's 1.6% decline came from 158 names with no position above 1.5%. The equal-weight bank fund KBE sat in between, at -2.1%.
Moynihan's fee comment is a capital-markets fact, not a loan-loss fact. Paper losses on bonds a bank intends to hold to maturity do not hit regulatory capital unless the bank sells. They still sit on the economics of the franchise when the 10-year is at 5%. Regional banks, whose books are more loan than long-duration securities, did not have that mark staring at them in the same size. They also do not live on the same investment-banking calendar.
None of that is a weekly deposit print. What banks pay for funding will reset after this hike, not in five sessions. The next earnings season is where the margin and the deposit beta show up.
XLF is banks, Berkshire, and payments
The $53.6 billion XLF tracks the Financial Select Sector Index: 76 stocks, 0.08% in fees, JPMorgan and Berkshire Hathaway 24% of assets together, then Visa, Mastercard, and Bank of America. The top 10 names are 57% of the book. On etf.net's published method, the holdings pillar, which measures concentration and how complete the book is, ranks XLF 14th of 18 funds in Financials (Broad) because of that concentration. Payments and Berkshire are not lenders. Berkshire, which named Howard Buffett chairman on Friday as Warren Buffett became chairman emeritus, was down 0.12% for the week.
Insurance, which lives on underwriting rather than the funds rate, barely moved: KIE fell 0.64%, and the iShares U.S. Insurance ETF IAK fell 0.57%.
The iShares U.S. Broker-Dealers & Securities Exchanges ETF IAI fell 2.7%, in line with the capital-markets fund KCE. Goldman Sachs and Morgan Stanley, the fund's two largest holdings, fell 8.5% and 5.5%. Coinbase and Robinhood rose 10.8% and 6.4%.
Year to date the split is the reverse of this week's. KRE is up 13.6%. XLF is up 2.9%, 9.7 percentage points behind SPY. European financials EUFN is up 14.2% in 2026 even after a 2.8% week. The 2026 financials trade has been regionals and Europe, not the S&P 500 financials sleeve.
Chart: U.S. sector financials sit far **below** Europe this year
The week's funds, Friday, September 11 close to Friday, September 18 close, total return:
Credit did not crack
If this had been a credit week, high-yield would have said so. The ICE BofA U.S. High Yield option-adjusted spread, the extra yield those bonds pay over Treasuries, stood at 2.65% on September 11 and 2.70% on Thursday, September 17, five basis points wider. The iShares high-yield corporate bond fund HYG was down 0.09%. Investment-grade corporates LQD rose 0.36%. Preferreds PFF fell 0.50%. Policy rates rose a quarter point against a five-basis-point move in high-yield spreads. The damage was duration, fee guidance, and the mix inside the equity funds, not a sudden hole in loan books.
If you own XLF, you own JPMorgan, Berkshire, Visa, and Bank of America's bond book in the same sleeve, and this week that sleeve followed the money-center names. The regional fund that is actually a loan book fell less, and it is still well ahead of XLF for 2026. Deposit costs and loan yields reset on a lag that five sessions cannot capture.
Frequently asked
Why did bank stocks fall when the Fed raised rates?
Higher rates showed up first as weaker investment-banking fee guidance and markdowns on bonds banks already hold, not as fatter margins.
Why did regional banks hold up better than the big banks?
Their books are more loan than long-duration securities, so they didn't face the same mark, and they don't live on the same investment-banking calendar.
Was this a credit scare?
No: high-yield spreads widened only five basis points and high-yield and investment-grade funds barely moved, so the damage was duration and fees, not loan losses.
What do you actually own in XLF?
A concentrated book where JPMorgan and Berkshire are about a quarter of assets and Visa and Mastercard add more: payments and Berkshire aren't lenders.