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.
Rivals to XLF include the Fidelity MSCI Financials Index ETF (NYSEArca: FNCL), iShares U.S. Financials ETF (NYSEArca: IYF) and Vanguard Financials ETF (NYSEArca: VFH).
“Financials actually began the year as one of the most beaten-down sectors of the market, trailing other big sectors like tech. But there has steadily been a rotation out of growth stocks like big tech and into financials and industrials, in particular, Tepper noted,” reports CNBC.
Despite the early year lethargy, XLF is sporting a fourth-quarter gain of over 10% and the ETF has seen fourth-quarter inflows of $2.95 billion. Only six ETFs have added more new assets this quarter than XLF and none of those funds are sector ETFs.
On the back of three interest rate hikes this year and more coming in 2018, the financial services sector could be working its way into a period of long-term out-performance. The recent rally in the sector could still be in the early innings, according to some market observers.
For more information on the financial sector, visit our financial category.