December Headwinds: Why the Financial Sector ETF Might Stumble This Month

When December rolls around, most investors think “Santa Claus rally” and historically strong equity performance. The broader market has averaged a 0.6% gain in December over the past two decades, and the S&P 500 sits in its best six-month window during this period. But this seasonal optimism doesn’t apply uniformly across sectors—and right now, the Financial Select Sector SPDR ETF (XLF) looks particularly precarious heading into late December.

On the surface, things seem fine. The fund has climbed nearly 3% so far this month, and its historical December average of 1.47% gains since 2010 suggests resilience. Yet several lurking concerns could make this apparent strength short-lived.

The Core Problem: Interest Rates and Banking Pressure

The real issue starts with the Federal Reserve’s recent policy shift. After three consecutive interest rate cuts, the economic landscape has fundamentally changed for financial institutions. When borrowing costs decline, banks immediately feel the squeeze—lending margins compress, and returns on collected insurance premiums thin out. This is a material problem for XLF because more than 40% of the fund’s portfolio consists of bank and insurance stocks.

Consider the holdings that face particular December vulnerability. U.S. Bancorp (USB) and Moody’s (MCO) have established a troubling pattern: both regularly rank among the S&P 500’s worst performers during December’s second half, regardless of broader market conditions. This isn’t coincidental—it reflects structural headwinds these financial institutions face as year-end approaches.

The Consumer Spending Wildcard

A secondary concern involves holiday consumer behavior. When families feel confident about the economy, December spending surges—often fueled by credit card usage and accumulated debt. That credit card activity matters significantly to XLF because four of the fund’s top ten holdings are major U.S. credit card issuers. If holiday shopping disappoints this year, these financial service providers won’t generate the transaction volumes they need to offset the interest rate challenge.

This creates a compounding risk: lower rates squeeze profit margins while weak consumer spending reduces transaction volume. XLF’s architecture makes it particularly vulnerable to both simultaneously.

The Berkshire Hathaway Complication

Adding another layer of uncertainty is Berkshire Hathaway, which represents 11.6% of the fund’s weight—making it the single largest holding. The conglomerate’s stock has underperformed meaningfully this year, up just 9.21% compared to broader market gains. More problematic is the leadership transition underway at Berkshire.

CEO Warren Buffett’s retirement has already triggered organizational changes. Recently, Todd Combs, investment manager and GEICO’s CEO, departed the company amid broader executive reshuffling. If additional high-ranking executives announce departures this month, Berkshire shares could face additional December pressure, directly dragging down XLF’s performance.

What This Means for December Strategy

The fund isn’t a short candidate—its long-term fundamentals and track record suggest bear market scenarios remain unlikely. However, investors should recognize that owning XLF through late December carries meaningful near-term risks that extend beyond typical seasonal patterns. The confluence of compressed banking margins, uncertain consumer spending, and leadership uncertainty at a flagship holding creates a genuine December headwind.

Sometimes historical seasonal strength breaks down. This December appears to be one of those periods where checking the calendar isn’t enough—checking the holdings matters more.