The Federal Reserve’s decision to not raise interest rates last month was seen as a blow to financial services ETFs, such as the Financial Services Select Sector SPDR (NYSEArca: XLF), but that does not mean the stocks held by XLF and rival financial services ETFs are not churning out impressive profits.
One point of attraction for XLF and rival financial services ETFs has been the discounted valuations of big bank stocks. However, the cheapness of U.S. banks belies the strength of the financial sector. Over few years, banks have shed unprofitable businesses and assets while bulking up capital to return some to shareholders through stock buybacks and dividends, the Wall Street Journal reports.
“One immediate impact of the failure to raise interest rates is that it caused the value of bank assets to rise and it improved real book values. This is because an estimated 92 percent of bank assets are financial instruments. If interest rates remain stable or decline slightly, the value of these assets rises in real terms. This improves banking industry book value,” said Dick Bove of Rafferty Capital Markets in a note cited by Jeff Cox of CNBC.
After most of the financial industry revealed quarterly earnings, seven big banks are still trading below their book value, reports Jon C. Ogg for 24/7 Wall St. Book value is an accounting value that tallies the total value of a company’s asset, minus liabilities and intangibles, and compares it to the company’s market value.
In other words, investors can gain access to attractive valuations and solid earnings growth with an ETF such as XLF.