The arrival of December brings with it several potentially compelling seasonal trends investors may want to consider and that is particularly true with sector exchange traded funds.
Dating back to 1999, the first full trading year for the nine sector SPDR ETFs, the Materials Select Sector SPDR (NYSEArca: XLB) and the Energy Select Sector SPDR (NYSEArca: XLE) have generated the best December returns. The month is young, but XLE and rival energy ETFs are off to poor starts after poor showings in November. [Best Sector ETFs for December]
There are other sector ETFs to consider for December strength, including financial services funds. Financials often start outperforming the broader market in October, but that out-performance kicks into high gear this month and extends further in mid-January, according to Thackray’s 2014 Investor’s Guide.
“The main driver for the strong seasonal performance of the financial sector has been the year-end earnings of the banks that start to report in mid-January. A strong performance from mid-January has been the result of investors getting into the market early to take advantage of positive year-end earnings,” notes Brooke Thackray.
Inflows data indicate some investors have been preparing for a run by financial services ETFs. The Financial Select Sector SPDR (NYSEArca: XLF), the largest financial services ETF, added over $800 million in new assets last month. Over the past month, XLF has trailed the S&P 500 by 40 basis points, but earnings surprises could be just the tonic bank stocks and ETFs need to validate the aforementioned seasonality.
Loan sales increased 46% in the three months ended September. Additionally, other loan categories were broadly higher, along with 2.4% rise in auto loans. Bank loan balances hit a record $8.2 trillion in the third quarter, adding onto loan balance growth over the second quarter, which increased above $8 trillion, reports Ryan Tracy for the Wall Street Journal. During the third quarter, profits for U.S. banks totaled $38.7 billion, up from $36.1 billion in the year earlier period. [Bank ETFs Could see Stellar Revenue Growth]
XLF is not alone in attracting in new assets. After bleeding assets in October, the iShares U.S. Financials ETF (NYSEArca: IYF) added $125 million in new capital last month. The $1.3 billion IYF allocates nearly 28% of its combined weight to Berkshire Hathaway (NYSE: BRK-B), Wells Fargo (NYSE: WFC), J.P. Morgan Chase (NYSE: JPM), Bank of America (NYSE: BAC) and Citigroup (NYSE: C).
Several of the marquee constituents in XLF and IYF trade at discounts to the S&P 500. 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 1.6%. Financials have been among the biggest drivers of S&P 500 dividend growth over the past several years. [Bank ETFs as Value Plays]
Financial Select Sector SPDR
