The results of the much awaited Federal Reserve's annual test of
the big banks' financial health indicate a brighter picture than
last year. The stress test - first conducted in 2009 after the
collapse of big financial institutions like Lehman Brothers and
American International Group, Inc. - is an important tool used by
the financial regulators to gauge whether the country's financial
system can withstand extreme adverse economic conditions in the
In the latest review, 29 of the 30 banks cleared the Fed test,
indicating that the vast majority of the country's largest
financial institutions have enough capital to withstand severe
losses during times of market turmoil.
The most surprising outcome of the test was that the smaller banks
fared better than much bigger names like
JPMorgan Chase & Co.
The Goldman Sachs Group, Inc.
) with Tier 1 common capital ratio of 3.5%, was the only bank to
fail to meet the minimum requirement of 5%.
State Street Corp. (
), with a Tier 1 common capital ratio of 13.3%, topped the list,
and was followed by The Bank of New York Mellon Corp. (
) and Discover Financial Services (
), each having a ratio of 13.1%.
The test was based on 28 variables affecting the global domestic
economy, including a drop in housing prices, a sharp 50% slump in
equity prices, and a spike in unemployment.
The Fed stress test thus signifies that at present American banking
giants are better-positioned to withstand a severe economic
downturn should it happen.
Moreover, with an interest rate hike in the cards down the line,
the broad financial sector, including banks and insurance, are
expected to benefit from rising rates (read:
Play Rising Rates with These ETFs
With enough capital in their coffers, the banks look good and so
does the financial sector at large. For an ETF approach, one can
add any of the below mentioned funds for diversified exposure to
Financial Select Sector SPDR Fund
The fund tracks the S&P Financial Select Sector Index, giving
investors exposure to the U.S. financial space.
The fund holds a basket of 84 stocks with the top three holdings -
Wells Fargo & Company, JPMorgan Chase & Co. and Berkshire
Hathaway Inc. Class B - each receiving about 8% of the
portfolio. The fund also includes some of the well-known
banks such as Bank of America Corporation, Citigroup Inc. and
Goldman Sachs Group Inc. in its top ten holdings.
Sector-wise, banks occupy around 39% of fund assets, followed by
insurance (17.35%) and capital markets (13.19%) (see
all Financial ETFs here
The fund has returned 25% in the past one year and have added 2.3%
so far this year. Also with an expense ratio of 18 basis points,
XLF is one of the cheapest in its space. The ETF currently carries
a Zacks ETF Rank #1 or 'Strong Buy'.
RevenueShares Financials Sector Fund (
The fund holds the same securities as the S&P 500 Financials
Index. However, it presently holds only 81 stocks, which are ranked
by their revenues, instead of market capitalization.
Berkshire Hathaway, JP Morgan and Bank of America are the top
holdings currently. The fund gained a stellar 42% during 2013,
while adding 1.8% since the start of the year.
RWW currently has a Zacks ETF Rank #1 (Strong Buy) (read:
3 Top Ranked ETFs from Hottest Sectors
PowerShares KBW Capital Markets Portfolio
This often overlooked fund manages an asset base of $9.8 million
and tracks the KBW Capital Markets Index.
The index tracks the performance of companies that do business as
broker-dealers, asset managers, trust and custody banks or
exchanges that are publicly traded. This focus results in the fund
holding a small basket of 24 stocks.
State Street Corp., which topped the stress test, occupies the
fourth spot in the fund with 7.8% allocation. Morgan Stanley and
Goldman Sachs are two other banks listed in the top ten of the fund
Best ETF Strategies for 2014
The fund currently carries a Zacks ETF Rank #2 (Buy) and has
returned 27.28% in the past one year.
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BANK OF AMER CP (BAC): Free Stock Analysis
CITIGROUP INC (C): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis
REVENU-FINL SEC (RWW): ETF Research Reports
SPDR-FINL SELS (XLF): ETF Research Reports
ZIONS BANCORP (ZION): Free Stock Analysis
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