ETF Playbook For Bank Earnings: Big Bets On Goldman, Morgan Stanley, BofA

While the market absorbs a mixed bag of inflation reports and Fed projections, focus is shifting back to earnings, beginning with the largest banks. Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS) and Bank of America (NYSE:BAC) reported on Wednesday and their figures have the financial sector cheering.

But rather than stock-picking their way through spreadsheets and surprise provisions, ETF investors can take a more direct approach: positioning through financial sector funds that provide broad exposure to Wall Street’s largest names.

The earnings season started on a positive note on Tuesday. Wells Fargo & Company (NYSE:WC) topped forecasts with higher-than-expected second-quarter adjusted EPS on July 15, benefiting from higher net interest income and careful cost discipline. Meanwhile, JPMorgan Chase & Co. (NYSE:JPM) also exceeded expectations, with solid performances from both its consumer and commercial banking segments.

These initial beats gave hope that the remainder of the large bank group— Goldman Sachs, Morgan Stanley, and Bank of America— could do the same, and they did today.

Bank of America beat earnings estimates and saw revenue growth. Goldman Sachs also came ahead of estimates, as trading operations generated $840 million more revenue than expected. Morgan Stanley, too, beat earnings estimates on increased trading revenues.

This creates a key window now for ETF investors wanting to ride or hedge against banking sector volatility.

The ETF Earnings Playbook: Financials In Focus

Bank stocks can sometimes serve as macroeconomic health indicators. Loan expansion, consumer credit, investment banking work, and trading revenues all speak to a larger economic tale. And when sentiment is soaring (as it is currently, with the CNN Fear & Greed Index in the “Greed” range), financials may receive a boost or a beating from even small surprises.

Three ETFs are in the limelight this earnings season:

Financial Select Sector SPDR Fund (NYSE:XLF): The fund, which has an expense ratio of 0.08%, has leadership holdings in JPMorgan Chase, Bank of America, Wells Fargo, Goldman Sachs, and Morgan Stanley.

Why it matters: XLF is the favorite ETF among retail and institutional investors for financials. It’s diversified across large-cap banks, insurers and asset managers.

The trade: Bullish on big banks beating earnings estimates? XLF provides broad but concentrated exposure.

SPDR S&P Bank ETF (NYSE:KBE): This fund has an expense ratio of 0.35% and has exposure to large and regional banks. Among the top holdings are Bancorp (NASDAQ:TBBK), Citigroup Inc (NYSE:C), and Northern Trust Corp (NASDAQ:NTRS).

Why it matters: KBE equal-weights its positions, so it’s not controlled by the megabanks. That makes it a good bet if you believe the regional banking sector will surprise to the upside, or just remain stable after a rough year.

The trade: Use KBE to get a better handle on the banking sector, particularly if you anticipate positive news beyond the household names.

SPDR S&P 500 ETF Trust (NYSE:SPY): Top holdings: Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Nvidia (NASDAQ:NVDA), and, yes, the banks.

Why it matters: SPY is not a financials ETF, but banking earnings tend to lead the overall market in terms of setting the tone. Positive bank earnings can boost investor sentiment across the board.

The trade: For those who think banks will lead the momentum and enhance risk appetite, SPY is a means to participate in that without committing to a single sector.

Although the hot headline inflation print was at 2.7% YoY, core inflation surprisingly came in lower. That could be a green light for the banks, particularly if interest rate expectations are maintained and the loan books are healthy.

Despite this, not everything is rosy. The Dow fell by over 400 points on Tuesday and healthcare and materials pulled the S&P 500 down. But Nasdaq jumped to new highs following Nvidia’s AI-powered chip romp, illustrating just how divided the market is.

Know Your Risk, Pick Your Basket

Earnings season is never predictable, but with ETFs, you don’t have to choose winners and losers stock by stock. Let the sector and investor sentiment do the heavy lifting.

So, whether you’re placing your bets on big beats or hedging against a letdown, ETFs such as XLF, KBE and SPY provide diversified, accessible ways to make your perspective a reality.

Because nothing speaks greed like doubling down on bank earnings, through ETFs.

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