The U.S. financial sector appears to be in a beneficial position, with the yield curve steepening, initial fourth-quarter investment banking results posting strong numbers, and credit losses expected to remain cyclically low.
In addition, Federal Reserve Chairman Jerome Powell has said he expects a series of interest rate hikes this year, which should boost the financial sector’s growth. Goldman Sachs Group, Inc. (GS) joined other big banks in forecasting interest rate hikes four times this year.
Given this backdrop, we think financial sector ETFs Financial Select Sector SPDR Fund (XLF), Vanguard Financials Index Fund ETF Shares (VFH), and SPDR S&P Regional Banking ETF (KRE) could be solid bets. These funds are rated A (Strong Buy) in our proprietary POWR Ratings system.
Financial Select Sector SPDR Fund (XLF)
XLF invests at least 95% of its total assets in the securities of its underlying Financial Select Sector Index, which includes companies from diversified financial services, insurance, commercial banks, and real estate investment trusts.
XLF had $49.12 billion assets under management as of January 11. Its top holdings include Berkshire Hathaway Inc. (BRK.B), with a 12.81% weighting, JPMorgan Chase & Co. (JPM), with a 10.83% weighting, and Bank of America Corp. (BAC), with a 7.75% weighting. The fund has a 0.12% gross expense ratio, which is significantly lower than the 0.86% category average. Over the past year, its net fund inflows have been $9.79 billion, and it had a NAV of $41.39 as of January 11.
XLF’s $0.60 annual dividend yields 1.51% at the prevailing share price. The fund has gained 33.4% over the past year and 12.7% over the past six months to close yesterday’s trading session at $41.39. It has a beta of 1.25.
XLF’s strong fundamentals are reflected in its POWR Ratings. The trust has an overall A rating, which equates to Strong Buy in our proprietary rating system. It has a Trade and Buy & Hold grade of A. In the A-rated, 41-ETF Financial Equities ETFs group, it is ranked #1. Click here to see the additional POWR Rating for XLF’s Peer grade.
Vanguard Financials Index Fund ETF Shares (VFH)
VFH offers targeted exposure to the United States Financial Sector, making the ETF an option for investors seeking to bend their portfolios toward U.S. banks. The sector-specific ETF tracks the performance of the MSCI US Investable Market Index, which comprises the stocks of large, mid-size, and small companies in the U.S. financial sector.
As of Nov. 30, the fund’s total net assets stood at $12.2 billion. Its top holdings include JPM, with a 9.20% weighting, BRK.B, with a weighting of 7.10%, and BAC, with a weighting of 6.50%. The fund had a $101.69 NAV as of January 11. Its 0.10% expense ratio is considerably lower than the 0.86% category average. The ETF’s net inflows were $1.95 billion over the past year.
VFH pays a $1.77 annual dividend, which yields 1.78% at the prevailing share price. The fund has gained 32.7% over the past year to close yesterday’s trading session at $101.74. It has gained 12.6% over the past six months. The fund has a beta of 1.27.
It is no surprise that VFH has an overall A rating, which translates to Strong Buy in our POWR Rating system. The fund has an A grade for Trade and Buy & Hold. It is ranked #2 in the Financial Equities ETFs group. To see the additional POWR Ratings for VFH, click here.
SPDR S&P Regional Banking ETF (KRE)
KRE seeks to track the performance of the S&P Regional Banks Select Industry Index, employing a sampling strategy. The ETF invests at least 80% of its total assets in the securities that comprise the index. The fund gives investors exposure to a sub-sector of the financial sector.
With $5.97 billion assets under management as of January 11, KRE’s top holdings include Signature Bank (SBNY), with a 2.08% weighting, M&T bank Corporation (MTB), with a 2.06% weighting, and People’s United Financials, Inc. (PBCT), with a weighting of 2.05%. It has a 0.35% gross expense ratio, which is significantly lower than the 0,86% category average. The ETF’s fund flows came in at $2.41 billion, and as of January 11, it had a $77.38 NAV.
KRE’s $1.40 annual dividend yields 1.87% at the current share price. It has a 1.54 beta. Over the past year, the fund has gained 33.8% to close yesterday’s trading session at $77.42. It has gained 19.5% over the past six months.
KRE’s promising prospects are reflected in its POWR Ratings. It has an overall A rating, which translates to Strong Buy. It also has an A grade for Trade and Buy & Hold. It is ranked #3 in the Financial Equities ETFs group. In addition to the POWR Rating grades we have stated above, one can see the KRE rating for Peer here.
Note that KRE is one of the few stocks handpicked currently in the Reitmeister Total Return portfolio. Learn more here.
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XLF shares were trading at $41.39 per share on Wednesday afternoon, down $0.00 (0.00%). Year-to-date, XLF has gained 5.99%, versus a -0.95% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...
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