Financial sector stocks and related exchange traded funds have largely fallen behind the broader market this year. However, this area of the market is beginning to look like a good value play.
The Financial Select Sector SPDR (NYSEArca: XLF) has increased 8.0% year-to-date, compared to the 8.9% rise in the S&P 500. [Financial ETFs Could Outperform Ahead of Fed Tightening]
While the broad markets have been hovering near record highs, with the broader equities market looking a little pricier. many financial stocks remain relatively cheap. For instance, Wells Fargo (NYSE: WFC) is trading at 13 times earnings while JPMorgan (NYSE: JPM) is hovering around 15 times, whereas the S&P 500 index is trading at about 17 times earnings, reports Bryan Borzykowski for CNBC.
XLF, which has a 8.7% position in WFC and 7.9% in JPM, shows a price-to-earnings ratio of 15.2.
Looking ahead, Andrew Sleeman, a portfolio manager with Franklin Mutual Financial Services Fund, argues that bank stocks still have a lot of room to grow.
“The economy is starting to pick up, we’re starting to see some loan growth, and an interest-rate rise could lift the whole sector,” Sleeman said in the article. “If rates do climb, then financials could be the sector to be exposed to.”
Erik Oja, a banking industry analyst with S&P Capital IQ, believes that while the sector’s valuations have been fairly volatile since the economic downturn, financial stock valuations are now stabilizing.
Additionally, dividends are beginning to rise as well. The average financial sector yield dipped to 1.22% in December 2009 from 4.44% in December 2008, and now, yields are back up to 1.8%. The financial sector also makes up about 14.77% of the S&P 500’s overall yield, compared to 9% in 2009. XLF shows a trailing 12-month yield of 1.52%, whereas the S&P 500 has a current yield of about 1.8%.
Looking ahead, Sleeman argues that dividends will continue to rise as regulators relax some of its more stringent rules.
“It’s a huge opportunity for total return to improve,” Sleeman said. “Whether it’s through buybacks, dividends or a combination of both, there’s certainly an opportunity to increase returns to shareholders.”
Financial Select Sector SPDR
For more information on the financial sector, visit our financial category.
Max Chen contributed to this article.