A Sector That's a Credible ETF Value Destination

With the current bull market in U.S. equities continuing, some investors believe it is getting increasingly difficult to find sectors that are inexpensive relative to their long-term averages. Energy and financial services are among the sectors frequently mentioned as showing some signs of value.

The Financial Select Sector SPDR (NYSEArca: XLF) and other financial services exchange traded funds have spent ample time in the spotlight this year as the Federal Reserve raised interest rates in March and due to speculation that the Trump Administration could deliver reforms that lift the S&P 500’s second-largest sector weight.

Higher interest rates would help widen the difference between what banks charge on loans and pay on deposits, which would boost earnings for the financial sector. Regional banks are among the stocks most positively correlated to rising interest rates because higher rates improve net interest margins.

“Large bank stocks have been weak recently after seeing outperformance in the months following the elections. Concerns have arisen as to whether any meaningful policy changes will arise,” according to a JPMorgan note cited by CNBC. “Large bank stocks are now attractively valued relative to the market.”

With a steepening yield curve or wider spread between short- and long-term Treasuries, banks could experience improved net interest margins or improved profitability as the firms borrow short and lend long. Although the Fed unveiled its first rate hike of 2017 last month, the central bank’s dovish tone punished regional bank stocks and ETFs.