The financial services sector has gotten something of a bad reputation this year, but as measured by the Financial Select Sector SPDR (NYSEArca: XLF), the group has not been as dreadful as some investors have been led to believe.
XLF, the largest U.S. sector ETF, has outpaced three of the nine sector SPDRs. More importantly, XLF is up 4.4% just this month and raced to a new 52-week high on Thursday. Actually, let’s not cheat XLF. Thursday’s close at $23.20 was the ETF’s highest since May 2008.
XLF and rival financial services ETFs are not strangers to headline risk, so it can be considered impressive that the fund made a new high on the same day the federal government ordered Bank of America (NYSE: BAC) to pay $16.7 billion related to mortgage bond sales that helped inflate the housing bubble that stoked the global financial crisis.
Still, BofA and Citigroup (NYSE: C), XLF’s fourth- and fifth-largest holdings, respectively, hit new 52-week highs Thursday. Those stocks combine for over 11% of the ETF’s weight. Although the $16.7 billion penalty levied against BofA is the largest against a single entity in U.S. history, headlines for big banks and some of the relevant ETFs have been kind this month.
Earlier this month, BofA helped lift XLF after the Federal Reserve signed off on the bank raising its quarterly dividend to five cents a share from a penny. [BofA Boosts Bank ETFs]
Last week, Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A) hit $200,000 a share for the first time. Berkshire’s class B shares are XLF’s second-largest holding at 8.6% of the ETF’s weight. [Berkshire Blast a Boon for These ETFs]
“We might be seeing a healthy move or rotation taking place in the banking sector,” according to Captain John Charts, which noted XLF is bumping up against a key resistance area. “We would like to see an upside breakout here to confirm Citi and Bank of America breakouts before getting too bullish.”
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