Financial services stocks and exchange traded funds, such as the Financial Select Sector SPDR (NYSEArca: XLF), have struggled to start 2016, but at least one well-known analyst views the sector as a safe-haven bet.
With higher interest rates in place, financial services ETFs entered 2016 as potentially important tells regarding what investors should expect from equities this year. The sector is the second-largest weight in the S&P 500 behind technology.
“The potential exposure of banks to the energy-dominated U.S. high-yield corporate bond markets has unnerved investors, and caused financial and energy shares to stall during the two trading sessions that followed the hike. Stocks in both those sectors have been closely correlated in recent weeks,” reports Reuters.
However, there is another important reason to consider bank stocks and ETFs: Rising profitability. In the case of regional banks, that profitability is expected to be enhanced if the Fed proceeds with boosting borrowing costs for the first time in nine years.
Previously, the Federal Reserve’s decision to hold off on an interest rate hike, ongoing economic weakness and concerns over trading revenues have weighed on the financial sector’s outlook.
“Top banking analyst Mike Mayo of CLSA said on CNBC’s “Fast Money Halftime Report” that he doesn’t think that banks have significant exposure to the problems in energy,” reports CNBC.
Another point of attraction for XLF and rival financial services ETFs has been the discounted valuations of big bank stocks. However, the cheapness of U.S. banks belies the strength of the financial sector. Over few years, banks have shed unprofitable businesses and assets while bulking up capital to return some to shareholders through stock buybacks and dividends, the Wall Street Journal reports.
The wider discrepancy between deposit and prime rates could translate to improved profit margins and a potentially stronger financial sector ahead. [Bank Sector ETFs Could Lead as Rates Rise]
“Given JPMorgan‘s performance after an upbeat earnings report, investors are looking ahead to earnings reports from other major banks. Mayo is bullish on the banks and says that people should look to them as ‘pillars of strength’ or ‘safe-havens in the current environment,’” according to CNBC.
Financial Select Sector SPDR
