Financial sector exchange traded funds could generate greater value for share holders after big banks passed the Federal Reserve’s stress test, and plan stock buybacks and dividend hikes.
The banking sector is lifting financials, with the iShares US Broker-Dealers ETF (NYSEArca: IAI) up 1.2%, PowerShares KBW Bank Portfolio (NYSEArca: KBWB) 1.7% higher and Financial Select Sector SPDR (NYSEArca: XLF) gaining 1.6% on Thursday. [Financial ETFs Could Bank on Positive Dividend News]
The financial sector has been lagging behind the broader market for years after the Fed forced banks to raise capital requirements in an attempt to obviate or at least diminish the effects of another financial crisis. Consequently, many banks were forced to cut back on value producing strategies for shareholders.
However, now that the majority of banks passed the Fed’s second round of stress tests, many will be raising dividends and share repurchases. For instance, Citibank (NYSE: C), which failed to pass the stress tests last year, is set to raise its dividends by 400% to 5 cents after offering a token 1 cent dividend over the past year. Citi is also planning $7.8 billion in stock buybacks, the Wall Street Journal reports.
Other banks are also increasing dividends, including Morgan Stanley (NYSE: MS) by 50%, Regions Financial (NYSE: RF) by 20%, Discover Financial (NYSE: DFS) by 17%, State Street (NYSE: STT) by 13%, BB&T (NYSE: BBT) by 12.5%, American Express (NYSE: AXP) by 12%, JPMorgan (NYSE: JPM) by 10% and Goldman Sachs (NYSE: GS) by 8%, among others.
Additionally, banks were planning stock buybacks, including $6.6 billion from American Express, $6.4 billion from JPMorgan and $4 billion from Bank of America (NYSE: BAC), among others.
However, Goldman Sachs, JPMorgan Chase and Morgan Stanley had to alter their planned payouts to investors to receive a passing grade from the Fed, The New York Times reports.
Bank of America and JPMorgan, though, only passed provisionally and could still fail later if it does not rectify problems that the Fed identified. On the other hand, Deutsche Bank’s American units and Santander of Spain failed the tests.
Looking at the range of ETF options to gain diversified exposure to the space, IAI includes a heavy weight in investment banks like Goldman Sachs and Morgan Stanley, but it also includes other positions in discount brokerages and stock exchanges.
KBWB features a more targeted play on U.S. banks, with a heavier emphasis on the largest players like Wells Fargo, Citigroup, JPMorgan and Bank of America. [An ETF Idea for Rising Bank Dividends]
Lastly, XLF takes a broader view of the financial sector, including sub-sectors like insurance, real estate investment trusts, and capital markets. Nevertheless, the financial sector ETF is still includes heavy positions in large banks like Wells Fargo, JPMorgan and BofA.
For more information on the financial sector, visit our financial category.
Max Chen contributed to this article.