U.S. Markets closed

What Lies Ahead for Financials ETFs?

Zacks Equity Research
Q2 results of Equity Lifestyle Properties (ELS), American Campus Communities (ACC) and Agree Realty Corporation (ADC) to reflect impact of construction activity and effective leasing strategy.

The financial sector is attracting a lot of investor attention lately. With President Donald Trump passing the tax reform as law last week, analysts are highly optimistic about the financial sector’s performance going into 2018. Moreover, economic fundamentals and political optimism has also led to the recent rally in the sector.


Cause for Appeal


Republican leaders unveiled a $1.5 trillion tax reform plan aimed at reducing taxes for the corporate and individuals. After the tax reform was passed in the Senate with a 51-48 majority, it was sent to the House for a second vote owing to some technical issues. The bill was passed by the House with a 224-201 majority and was later signed by Trump, delivering the most sweeping tax overhaul in more than 30 years.


Trump received his first major legislative victory since he took office. The Financial sector is expected to derive huge benefit from the tax reform, as the corporate tax rate has been cut to 21% from 35%. Moreover, companies will be able to repatriate foreign earnings back into the United States at a lot lower rate.


GDP grew 3.2% in the third quarter, the Commerce Department said in its final estimate last week. Moreover, Fed’s preferred measure of inflation, core personal consumption expenditures price index, increased 1.5% year over year in November compared with 1.4% in the previous month.


Moreover, in its latest December meeting, the Fed hiked interest rates by 25 basis points. This is expected to be a positive for bank stocks. However, the Fed held on to its plans of three rate hikes in 2018 (read: ETF Winners & Losers Post Partly Dovish Fed Meet).


The passage of Trump’s tax reform has ignited hopes in the markets relating to deregulation plans. In case there are developments on that line, bank stocks will benefit greatly from the legislation. Trump has been a vocal critic of the Dodd Frank act passed following the 2008 crisis. He has criticized the law as being restrictive to business and aims to scrap it. Optimism related to Trump’s ability to pass his promised legislative policies has increased following his tax reform victory.


Let us now discuss a few ETFs focused on providing exposure to the space.


Financial Select Sector SPDR Fund XLF


This fund seeks to provide exposure to financial stocks in the U.S. equity markets. It has AUM of $32.8 billion and charges a low fee of 14 basis points a year.


From a sector look, the fund has high exposure to Banks, Capital Markets and Insurance sectors, with 44.2%, 20.6% and 18.8% exposure, respectively (as of Sep 30, 2017). The fund’s top three holdings are Berkshire Hathaway Inc Class B BRKB, JPMorgan Chase & Co JPM and Bank of America Corp BAC with 11.2%, 10.7% and 7.9% allocation, respectively (as of Sep 30, 2017).  The fund has returned 19.0% in a year and 20.7% year to date (as of Dec 22, 2017). XLF has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.


iShares U.S. Financials ETF IYF


This fund seeks to provide exposure to financial stocks. It has AUM of $2.0 billion and charges a moderate fee of 44 basis points a year.


From a sector look, the fund has high exposure to Banks, Diversified Financials and Real Estate, with 33.2%, 27.3% and 18.6% exposure, respectively (as of Dec 22, 2017). The fund’s top three holdings are Berkshire Hathaway Inc Class B, JPMorgan Chase & Co and Bank of America Corp with 7.2%, 7.1% and 5.5% allocation, respectively (as of Dec 22, 2017).  The fund has returned 17.0% in a year and 17.7% year to date (as of Dec 22, 2017). IYF has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.


Vanguard Financials ETF VFH


This fund seeks to provide exposure to financial stocks and tracks the MSCI US Investable Market Financials 25/50 Index. It has AUM of $7.3 billion and charges a fee of only 10 basis points a year.


From a sector look, the fund has high exposure to Diversified Banks, Regional Banks and Property & Casualty Insurance, with 30.1%, 15.4% and 7.6% exposure, respectively (as of Nov 30, 2017). The fund’s top three holdings are JPMorgan Chase & Co, Bank of America Corp and Wells Fargo & Co WFC with 9.1%, 7.0% and 6.6% allocation, respectively (as of Nov 30, 2017). The fund has returned 17.4% in a year and 18.8% year to date (as of Dec 22, 2017). VFH has a Zacks ETF Rank #2 with a Medium risk outlook.