The financial stocks, along with sector-related exchange traded funds, have fallen behind the broader markets but now appear relatively undervalued.
The Financial Select Sector SPDR (XLF) has increased 3.9% year-to-date and rose 12.1% over the past year. In comparison, the S&P 500 index is up 6.7% so far this year and increased 17.3% over the past year.
“While this sector is not incredibly inexpensive right now, it does trade at a relative discount to other U.S. equity sectors,” Morningstar analyst Bob Goldsborough said.
For instance, XLF shows a price-to-earnings ratio of 14.8 and a price-to-book of 1.2. Meanwhile, the S&P 500 index has a P/E ratio of 17.0 and a P/B of 2.3.
“In an environment where U.S. equities are largely fairly valued, this fund represents an opportunity for investors to buy into a sector that is relatively undervalued,” Goldsborough added.
Investors have been shying away from the financial sector, notably large banks, after the U.S. Federal Reserve’s recent stress tests revealed that the country’s 30 largest banks still showed some signs of weakness. [Financial Sector ETFs Still Face Headwinds]
Additionally, banks have been fighting against increased compliance, regulatory and legal costs due to stricter rules following the financial crisis. Between the end of 2013 and the end of 2007, regulatory costs increased by over 100%, or $35.5 billion, to $70.2 billion for Bank of America (BAC), Citigroup (NYSE: C), Goldman Sachs (GS), JP Morgan Chase (JPM), Morgan Stanley (MS) and Wells Fargo (WFC). [Post-Crisis Regulations Weigh on Financial ETFs]
However, the financial sector may be turning around after delivering its second-highest profit in at least 23 years for the three months ended June 30. [Financial ETFs Could Bank on Rising Profits]
Financial Select Sector SPDR
For more information on the financials sector, visit our financial category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.