After falling 1.1% on Friday, the Financial Select Sector SPDR (NYSEArca: XLF) is down nearly 4% to start 2015 and XLF and rival financial services ETFs are doing little to foster confidence among investors.
XLF and its brethren have been plagued by slack earnings results, increased regulatory burdens and high legal fees for big money center banks. According to analysts polled by Thomson Reuters, corporate earnings are expected to rise 4% over the fourth quarter year-over-year, reports Jessica Menton for International Business Times. However, analysts don’t expect any large surprises out of the financials area. [A Tepid Year for Bank ETFs]
With the bulk of XLF’s marquee holdings having delivered fourth-quarter results, “disappointing” is an accurate descriptor. For example, Dow components J.P. Morgan Chase (NYSE: JPM) and Goldman Sachs (NYSE: GS) along with Wells Fargo (NYSE: WFC), Bank of America and Citigroup (NYSE: C) each report either top or bottom line (or both) results that disappointed in some fashion. Those stocks combine for 29% of XLF’s weight. Each is a top 10 holding in the ETF.
However, the financial services sector, the second-largest sector in the S&P 500 behind technology, has the look of a rebound candidate.
“The XLF has really been beaten up over the past two weeks because we’ve had some pretty disappointing news for Q4 earnings. It’s early in earnings season but the financials tend to report early and we’ve had these past two weeks of disappointing trading revenue. But I really see this as a one-time event. I expect this to be flushed out by the time we get to next quarter,” said Erin Gibbs, equity chief investment officer at S&P Capital IQ Global Capital Markets, in an interview with CNBC’s Lawrence Lewitinn.
Based on S&P price targets for XLF’s holdings, the research firm sees 11% upside for the largest financial services ETF, according to CNBC.
Some investors are not waiting around for XLF’s rebound to materialize as highlighted by $1.1 billion of outflows from the ETF this year. That is by far the worst flows data of the nine sector SPDR ETFs.
However, the case for patient investors being long XLF is not without merit. The financial services sector is one of just two expected to deliver double-digit dividend growth this year and the sector is inexpensive compared to the S&P 500. XLF’s P/E of 14.5 is below the 17 P/E on the benchmark U.S. index. [A Financial ETF With Momentum]
Financial Select Sector SPDR
ETF Trends editorial team contributed to this post.