The financial sector has been on the mend for quite some time
and is expected to continue as one of the top performing sectors
in the coming months. As a result of increased oversight,
improved capital levels and better risk management systems, the
industry is now in a much better shape than it was five years
Last month, Moody's changed their outlook on US banks to
"stable" from "negative". According to the rating agency
"sustained GDP growth and improving employment conditions will
help banks protect their now-stronger balance sheets".
estimates, finance sector earnings are expected to increase 19.1%
during the second quarter from the prior-year quarter. Further,
while the revisions trend for the S&P 500 as a whole
continues to be neutral, finance sector revisions trend has been
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insured banks reported a record profit of $40.3 billion in the
first quarter of 2013, up 15.8% from the first quarter of 2012.
Further, the number of banks on the problem list continued to
decline and only four banks failed during the quarter-the
lowest since 2008. (Read:
Buy these ETFs for dividend growth
The picture doesn't look so good if we dig deeper into
earnings' quality. About a quarter of profits earned by the top
five banks was a result of loan loss reserve release according to
an analysis by
. Cost cutting was another important contributor to the bottom
However, the quality of earnings will improve as the economic
picture brightens further. And as the health of banks' loan
portfolio continues to improve, they will need less loan loss
reserves in future. Further, as the yield curve steepens,
expanding net interest margins will bolster banks' profits.
Another reason to be bullish on the financial sector is its
potential for increasing dividends and buybacks. Financials
have accounted for the largest increase in dividends in the last
three years, per WisdomTree. This year so far has already
been excellent in terms of dividends/buybacks increases by
finance companies as many of them got Fed approval after passing
Risks include rising interest rates which could slow down
mortgage origination as well as refinancing activities, though
decline in refinance will be partly offset by expanding net
interest margin. (Read: 3
important questions about your ETF portfolio
Further, regulatory costs may continue to climb up and
exposure to banks in Europe also remains a risk for bigger
Vanguard Financials ETF (
With an expense ratio of just 19 basis points, VFH is a cheap
way of getting a diversified exposure to financial services
Launched in January 2004, this ETF is now home to $1.4 billion
in assets. The product holds 515 stocks in its basket with
highest allocations to Wells Fargo, J P Morgan and Citigroup. The
fund's dividend yield is 1.88% as of now.
VFH is currently a Zacks Rank #1 (Strong Buy) ETF.
S&P Financial Select Sector SPDR Fund (
The largest and the cheapest fund within the financials
space--XLF tracks S&P Financial Select Sector Index. Launched
in December 1998, this fund has attracted more than $13.8 billion
The product holds 82 securities in its basket, with top
allocations to Berkshire Hathaway, JP Morgan and Wells Fargo. It
charges an expense ratio of just 18 basis points and has a
dividend yield of 1.50% currently.
XLF is currently a Zacks Rank #2 (Buy) ETF.
RevenueShares Financials Sector Fund (
RWW holds the same securities as the S&P 500 Financials
Index but these 81 securities in the fund are ranked by their
revenue, instead of market capitalization. Berkshire Hathaway, JP
Morgan and Bank of America are the top holdings currently.
The index and the fund have been outperforming their market
cap weighted cousin but the outperformance comes with slightly
higher expense ratio of 49 basis points.
RWW is currently a Zacks Rank #1 (Strong Buy) ETF.
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REVENU-FINL SEC (RWW): ETF Research Reports
VIPERS-FINANCL (VFH): ETF Research Reports
SPDR-FINL SELS (XLF): ETF Research Reports
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