AI Fears Weigh on Financial Stocks: What's Ahead for Financial ETFs?

Growing weariness around the AI trade and escalating AI-related disruption fears are weighing on vulnerable companies and sectors, as highlighted by the recent sell-off in U.S. software and data services stocks. At the same time, Wall Street’s scrutiny of Big Tech’s AI spending has intensified, with investors reacting negatively to signals of further capital expenditure expansion.

Financial firms came under pressure on Tuesday, reflecting rising concerns about AI-driven disruption in the sector. On Tuesday, the Dow Jones U.S. Financials Index, measuring the performance of U.S. companies in the financial services sector, dropped roughly 1.6% early in the session before rebounding about 0.7%.

Breaking Down the Sell-Off

According to CNBC, Altruist on Tuesday introduced a tax-planning tool capable of delivering results within minutes, sending financial stocks lower. Investors feared that AI-driven solutions could disrupt or diminish the relevance of established advisory and banking firms. Per another CNBC article, the concern among investors is that AI adoption could undermine the pricing power and profitability of traditional financial advisory models.

However, the sell-off appears to reflect heightened investor nervousness and knee-jerk reactions, including panic selling, rather than a shift driven by underlying fundamentals.

According to a Yahoo Finance article, the sell-off underscores a growing “sell first, ask questions later” mindset, as the rapid rollout of AI innovations funded by massive capital inflows intensifies concerns about structural disruption across sectors. Per John Belton, a money manager at Gabelli Funds, as quoted on the abovementioned Yahoo Finance article, stocks with even a hint of disruption risk are being dumped indiscriminately.

Reasons for Optimism?

According to a Reuters article, analysts continue to express confidence in the durable competitive moats established by traditional advisory firms. Additionally, the recent sell-off in the financial sector may be overdone, according to Sean Dunlop, equity research director at Morningstar, assuming the firm’s long-term outlook holds, as quoted on the abovementioned Reuters article.

Also, the anticipated Fed interest rate cuts in 2026 should provide a meaningful tailwind for the sector, as this could lower capital costs for banks. Within the financial sector, banks with diversified operations could see stronger loan activity as rates decline.

Wall Street’s largest banks wrapped up 2025 on a strong footing, with executives expressing optimism about the year ahead. According to a Federal Reserve survey, as quoted on Reuters, banks anticipate business loan demand to strengthen in 2026, supported by lower rates and increased spending and investment needs.

Moreover, U.S. banks boosted lobbying spending by 12% last year, the largest increase in over a decade, per a Reuters analysis. According to the Reuters article, the increase reflects intensified efforts to navigate significant policy shifts in Washington under President Donald Trump’s administration, with bank lobbying spending rising most sharply in the fourth quarter.

ETFs to Consider

Below, we highlight a few funds for investors to consider their exposure to the U.S. financial sector.

Investors can consider State Street Financial Select Sector SPDR ETF XLF, Vanguard Financials ETF VFH, Invesco KBW Bank ETF KBWB, iShares U.S. Financials ETF IYF and Fidelity MSCI Financials Index ETF FNCL.

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This article originally published on Zacks Investment Research (zacks.com).

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