ETFs: Focusing On Financials In February

After an end-of-the-year rally in 2017, the financial services sector — the second-largest sector allocation in the S&P 500 — is continuing the streak. The Financial Select Sector SPDR (NYSE: XLF), the largest exchange traded fund dedicated to the sector, is up nearly 7 percent to start the new year.

Improving loan growth and expectations for several more interest rate hikes by the Federal Reserve this year are among the catalysts some analysts are pointing to as potentially benefiting the financial services sector and ETFs like XLF. XLF enters February as CFRA Research's focus ETF for the month. 

"As of Jan. 26, 34 financial companies in the S&P 500 had already reported fourth quarter 2017 results, 28 of them (82 percent) beat the Capital IQ consensus,” CFRA Director of ETF & Mutual Fund Research Todd Rosenbluth said in a Tuesday note. “This was stronger than the 77-percent beat rate for the broader index. Meanwhile, 25 of the 67 constituents were CFRA Strong Buy five-star) or Buy (four-star) recommendations, indicating strong total return potential.”

The XLF Roster

XLF, which is home to nearly $35 billion in assets under management, holds 67 stocks. The weighted average market value of the holdings is $199.9 billion, cementing XLF's status as a large- and mega-cap fund.

Warren Buffett's Berkshire Hathaway Inc. (NYSE: BRK-B) and Dow component JPMorgan Chase & Co. (NYSE: JPM) combine for 22.5 percent of XLF's weight. Bank of America Corp. (NYSE: BAC) and Wells Fargo & Co. NYSE: WFC) combine for almost 17 percent.

“Following results, CFRA reiterated a Buy opinion on JPMorgan Chase, as average core loans were up 8 percent, with strength in the commercial and consumer bank,” said Rosenbluth. “CFRA views JPM as well-positioned to benefit from the Tax Cut and Jobs Act, expected higher interest rates, an improved macroeconomic environment and the likelihood that regulatory burdens will ease.”

Favorable Views

Overall, CFRA is bullish on XLF.

From a fund-level perspective, the ETF is viewed favorably for its low 0.14-percent expense ratio, its tight penny bid-ask spread and for bullish technical trends,” said Rosenbluth. “XLF is trading well above its 200-day moving average. The ETF pulled in $5.6 billion of new money in 2017, but has experienced $737 million of net outflows year to date through Jan. 26. Over the last six months, XLF has traded on average more than 50 million shares daily.”

CFRA has an Overweight rating on XLF, the highest rating the research firm applies to ETFs.

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Todd Shriber owns shares of XLF.