The Financial Select Sector SPDR (NYSEArca: XLF), the largest financial sector exchange traded fund, is up about 20% year-to-date, putting it on pace to match or slightly exceed the gains notched by comparable healthcare and consumer discretionary ETFs. However, some market observers believe that of those three sectors, financials are the best near-term bet.
Capital levels at major U.S. banks are viewed as solid. Additionally, the Trump Administration’s tax reform effort is seen as a potential catalyst for the financial services sector, but it remains to be seen if that effort will come to life. Some industry observers expect the tax reform would help banks boost earnings in significant fashion.
“Strategist Mark Tepper also believes that banks are the best bet of the three. The CEO of Strategic Wealth Partners said that given tax reform and a possible continued rise in interest rates, banks are in the best position to benefit from both,” reports CNBC.
Some good news for XLF and friends is that the financial services sector is widely regarded as perhaps the only sector in the U.S. that is attractively valued relative to the broader market and its own long-term averages. 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.