The financial stocks, along with sector-related exchange traded funds, have fallen behind the broader markets but now appear relatively undervalued.
The Financial Select Sector SPDR (NYSEArca: XLF) has increased 3.9% year-to-date and rose 12.1% over the past year. In comparison, the S&P 500 index is up 6.7% so far this year and increased 17.3% over the past year.
“While this sector is not incredibly inexpensive right now, it does trade at a relative discount to other U.S. equity sectors,” Morningstar analyst Bob Goldsborough said.
For instance, XLF shows a price-to-earnings ratio of 14.8 and a price-to-book of 1.2. Meanwhile, the S&P 500 index has a P/E ratio of 17.0 and a P/B of 2.3.
“In an environment where U.S. equities are largely fairly valued, this fund represents an opportunity for investors to buy into a sector that is relatively undervalued,” Goldsborough added.
Investors have been shying away from the financial sector, notably large banks, after the U.S. Federal Reserve’s recent stress tests revealed that the country’s 30 largest banks still showed some signs of weakness. [Financial Sector ETFs Still Face Headwinds]