Financial Sector ETFs Hanging in There

June 19th at 3:32pm by Tom Lydon

U.S. stocks were down across the board Wednesday after Federal Reserve Chairman Ben Bernanke said the central bank could start tapering its bond purchases this year if the economy cooperates.

Within sectors, financial stocks were holding up better to continue a trend that has been in place the past few months.

The financial sector has been in recovery mode over the past five years, supported by a recent increase in forecasted earnings. Higher capital levels, better risk management systems and tighter regulation has boosted shares and focused exchange traded funds.

According to Moody’s rating agency “sustained GDP growth and improving employment conditions will help banks protect their now-stronger balance sheets.”

Neena Mishra for Zacks reports that Moody’s changed their ratings of U.S.banks from “stable” to “negative,” due to the lack of earnings quality. However, this aspect of the sector is shadowed by the overall revision trends studied by Zacks. Financial sector earnings are expected to increase 19.1% over the second quarter of 2013, from the second quarter of 2012. The revisions trend for the S&P 500 is rated as neutral. [ETF Spotlight: Financial Sector]

The financial sector continues to lead the pack as a forerunner in performance rankings over the past few weeks, followed up by technology and healthcare, respectively. [Discount Brokers, Fund Firms Power Overlooked Financial ETF]

“Technology and Finance companies have been dividend growth leaders in the last few years. Technology companies currently have a lot of cash on their balance sheets and will continue to generate large amounts of cash going forward too. Finance companies have also been on the mend and many of them got Fed approval to raise dividends after passing stress tests,” Zacks Investment Research wrote.

The year-to-date best performing financial ETFs as of June:

  • iShares Dow Jones US Financial Sector Index Fund (NYSEArca: IYF) up 18.30%
  • SPDR Financial Select Sector Fund (NYSEArca: XLF) up 19.28%
  • Vanguard Financials Index Fund (NYSEArca: VFH) up 17.77%

Earnings quality for the larger banks is expected to improve with time. Most of the poor earnings quality ratings are due to a loss of loan reserves.

The sector is slated to improve with healthier bank loan portfolios, expanding net interest rate margins, and bigger profits, reports Mishra. According to WisdomTree, the rising dividends and busy buyback activity has been contributing to the performance of the sector and is anticipated to continue in the near future. [The Case for Financial Sector ETFs: Morningstar]

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.