Technology is the largest sector weight in the S&P 500 at just over 23%, but the real tussle for notoriety in the benchmark U.S. equity index is between healthcare and financial services for the second spot. Financials ceded that spot, by a hair, to healthcare on Tuesday.
The Financial Select Sector SPDR (NYSEArca: XLF), the largest exchange traded fund dedicated to the financial services sector, is up less than 1% year-to-date while only energy has performed worse than financial services this year. On the other hand, the Health Care Select Sector SPDR ETF (NYSEArca: XLV) is up almost 10%.
As of Tuesday’s “close, financials lost their #2 ranking in SPX by market capitalization. Financials fell to 13.82% of SPX’s market cap. IT continues to rank as the largest sector with 23.23%. Health Care is now once again the second largest sector, at 13.83% of the Index,” according to a Keefe, Bruyette & Woods note posted by Crystal Kim of Barron’s.
The financial sector valuations still look relatively cheap, compared to the broader market. The sector’s valuations are still about 25% below the average since the early 1990s.
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.
“Financials ranked as the second largest sector in SPX from 11/15/16 – 5/16/17 but then fell to the third largest sector on 5/17 before resuming their ranking as the second largest sector from 5/19-5/26,” according to the KBW note seen in Barron’s. “Thus far in 2017, SPX financials lost 0.99% of its market share within the Index.”
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 in March, the central bank’s dovish tone punished regional bank stocks and ETFs.
Weighing on bank stocks and ETFs is speculation that the Fed may not have the leeway with which to raise rates again this year.
For more information on the financial sector, visit our financial category.