The Financial Select Sector SPDR (NYSEArca: XLF), the largest financial sector-related exchange traded fund, is off 5.5% over the past month, bringing its year-to-date gain to a market-lagging 2.7%. XLF’s recent slide underscores the frustrations associated with the financial services sector this year.
Some strategists also argue that the financial sector may be a good area to look at this time around, given the potential for growth in a rising rate environment, along with potential tax and regulatory changes under the Donald Trump administration. After failing on the healthcare front, Congressional Republicans are likely to push forward with tax reform, looking to make that the centerpiece of their 2017 legislative accomplishments.
Interest rate concerns are evident following recent commentary from some big-name bank executives. Additionally, analysts have been reining in second-quarter earnings estimates for large banks, based in large part on declining net interest margins. However, financial services is widely seen as one of the few legitimate value opportunities in the U.S. equity market.
“The top six of its components make up about half of the XLF ETF. These are quality names like Bank of America Corp (NYSE: BAC), JPMorgan Chase & Co. (NYSE: JPM), Goldman Sachs Group Inc (NYSE: GS) and Berkshire Hathaway Inc. (NYSE: BRK.B). Fundamentally, they are the cream of the crop with reasonable valuations. They sell at PEs in the low teens and most pretty close to book value,” according to InvestorPlace.
Bankers are witnessing diminished demand for big loans out of businesses partly due to uncertainty over policy action on Capitol Hill. In addition, while the Federal Reserve’s rate hikes have helped banks earn more on loans, benefits were partially pared down by declines in long-term rates, with yields on Treasuries falling over the second quarter.
“Furthermore, banks recently passed stress tests confirming that they are fortresses, and they were cleared to do a lot of financial engineering. These are buybacks and dividends which will support their stock prices. Without a major change in the macroeconomics, the XLF ETF should remain a great value here,” according to InvestorPlace.
Related: Sector ETF Plays to Keep on Your Radar Ahead
Although the Fed has raised interest rates twice this year with another rate hike likely coming before the end of 2017, there are concerns about the central bank’s dovish tone and its impact on ETFs such as XLF. It is expected the Fed will boost borrowing costs one more time before the end of this year and that as many as three rate hikes could be on tap for 2018.
For more information on the financial sector, visit our financial category.