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XLF Sets Sights on Japan ETFs for Flows Crown


Financial services ETFs have been among the top-performing sector funds, both in recent months and year-to-date. In the past 90 days, the Financial Select Sector SPDR (XLF) is up 9.4% while the iShares U.S. Financials ETF (IYF) is higher by 7.9%. Year-to-date, those returns are 24.2% and 23.2%, respectively.

With Dow component J.P. Morgan Chase (JPM) and Warren Buffett favorite Wells Fargo (WFC) slated to get bank earnings rolling Friday before the opening bell, investors may want to get acquainted with bank ETFs if they have not done so already. [ETF Chart of the Day: Financials]

Investors do not need to steer away from familiar names to find an ETF that might be providing clues about what the market expects from big banks this earnings season and out of the group going forward. XLF, the largest financial services ETF assets under management and the second-cheapest with an expense ratio of 0.18% per year, could be the play to embrace. [Financial Services ETFs Hanging in There]

Options activity, particularly in the August 20 puts, has recently increased in the ETF, though that is not necessarily a bearish sign. Professional traders could be using those puts to hedge long positions in XLF components or the ETF itself.

Options trade is not the only noteworthy activity surrounding XLF in recent days. On Wednesday, the ETF saw inflows of $493.2 million, or an AUM jump of 3.23%, according to Index Universe data. On that day, only the SPDR S&P 500 (SPY) took in more new cash among ETFs.

Wednesday’s asset accumulation was not a one-off affair for XLF as the ETF has been one of the top asset-gathering funds this year. In fact, XLF is ranked third among all U.S. ETFs with year-to-date inflows of over $4.3 billion, according to Index Universe. Only the WisdomTree Japan Hedge Equity Fund (DXJ) and the iShares MSCI Japan ETF (EWJ) have drawn in more new assets among U.S. ETFs than XLF.

Catching DXJ for the 2013 asset-gathering crown will be tough for XLF as the former is ahead with nearly twice the latter’s total. However, XLF is about $900 million behind EWJ in terms of year-to-date inflows, so the second spot is reachable.

The J.P. Morgan and Wells Fargo earnings reports should go a long way to determining XLF’s near-term course as those stocks combine for almost 16.9% of the ETF’s weight. Next week, five more members of XLF’s top-10 holdings report quarterly results. That quintet, which includes Bank of America (BAC) and Goldman Sachs (GS), combines for 20.5% of XLF’s weight.

Financial Select Sector SPDR

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of DXJ and SPY.


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.