Believe It: Big Bank ETF in Rally Mode

Some investors are starting to warm to bank ETFs as highlighted by almost $212.4 million of inflows to XLF this week, perhaps a sign that some are being lured by compelling valuations. 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. [Value in Financial ETFs]

XLF has rallied against a backdrop of a trying environment for capital markets firms, insurance providers and regional banks. Waning volume is hampering broker-dealers and capital markets companies while insurance providers are dealing with the effects of low interest rates and lower demand for life insurance for policies. Insurance companies and capital markets firms combine for over 31% of XLF’s weight. [Insurance ETFs Look for Upside]

XLF has also rallied amid weakness for regional banks. The SPDR S&P Regional Banking ETF (NYSEArca: KRE), an ETF that is desperately waiting on the Federal Reserve to hike interest rates so regional lenders get a boost to net interest margins, is off almost 3% this year. XLF is trading slightly lower Friday, but the ETF hit another new high earlier in the session. KRE is trading modestly higher, but that ETF is more than 8% below its 52-week high.

Even with the recent bullishness, XLF could do with some added confirmation to attract new buyers. The potential is there as Wells Fargo (NYSE: WFC), J.P. Morgan Chase (NYSE: JPM), American Express (NYSE: AXP), U.S. Bancorp (NYSE: USB) and Goldman Sachs (NYSE: GS) reside an average of 3.7% below their 52-week highs. Those stocks combine for 24.4% of XLF’s weight.

Financial Select Sector SPDR


Chart Courtesy: Captain John Charts