BofA Breathes Some Life Into Bank ETFs

August 6th at 1:38pm by Todd Shriber

Moribund financial services exchange traded funds got some much-needed good news Wednesday when Bank of America (NYSE: BAC) announced the Federal Reserve granted it permission to raise its dividend to common stockholders for the first time in seven years.

BofA said it will pay a quarterly dividend of 5 cents per share up from the paltry penny a share it had been paying since early 2009. Today’s news removes some of the embarrassment suffered by the bank in April when it said it would be forced to suspend its planned $4 billion share repurchase plan and its previously announced dividend increase due to a calculation error related to the company’s acquisition of Merrill Lynch during the financial crisis.

The BofA dividend news sent shares of the Financial Select Sector SPDR (NYSEArca: XLF), the largest U.S. sector ETF, up 0.6% while the iShares U.S. Financials ETF (NYSEArca: IYF) added 0.55%. XLF and IYF have BofA weights of 5.76% and 4.41%, respectively.

BofA’s dividend news comes at a critical time for financial services. Entering Wednesday, IYF had tumbled 3.3% over the past month, highlighting the 2014 struggles of the financial services group, the second-largest sector weight in the S&P 500. Of the nine sector SPDR ETFs, only the Industrial Select Sector SPDR (NYSEArca: XLI) and the Consumer Discretionary Select Sector SPDR (NYSEArca: XLY) have been worse than XLF this year. [Industrial ETFs are Sagging]

Although BofA did not seek approval for a share repurchase program in its latest round of discussions with the Fed, the new dividend more than quadruples the stock’s dividend yield to 1.3% from 0.26%. Rivals Wells Fargo (NYSE: WFC) and J.P. Morgan Chase (NYSE: JPM) have an average dividend yield of 2.7%.

A higher dividend from BofA could stoke institutional buying of the stock and possibly stem the tide of outflows from some financial services ETFs. [Charts for Bank ETFs are Getting Nasty]

Supporters of the Direxion Daily Financial Bull 3X Shares (NYSEArca: FAS) are likely cheering the BofA news as well. That triple-leveraged ETF is up 1.5% today and looks poised for just its second higher finish since the start of this month. Traders have poured $102 million into FAS since last Wednesday, according to Direxion.

Twenty ETFs, including XLF and IYF, feature BofA among their top-10 holdings, according to S&P Capital IQ data.

Financial Select Sector SPDR

xlf