, already among this year's top-performing sector funds, got
another lift Tuesday on the back of constructive comments from
Moody's Investors Service.
Shares of the Financial Select Sector SPDR (NYSE:
) and the Vanguard Financials ETF (NYSE:
) are both up more than one percent after Moody's boosted its
outlook on the U.S. banking system to stable from negative.
The Moody's upgrade of the U.S. banking system reflects
"continued improvement in the operating environment and reduced
downside risks to the banks from a faltering economy,"
said the ratings agency in a statement
. The outlook had been negative since 2008.
Among other ETFs benefiting from the Moody's upgrade is the $1
billion iShares Dow Jones U.S. Financial Sector Index Fund (NYSE:
), which is up nearly one percent.
While Moody's is mostly bullish on the U.S. banking sector
over the next 12 to 18 months, the ratings agency did call
attention to the double-edged presented to banks by today's low
interest rate environment.
"The low interest rate environment is the single most
important issue that will drive U.S. banks' performance in the
next 12-18 months. Low rates help to promote private-sector
employment growth that more than offsets government job losses;
low interest rates also have supported the recent improvements in
the banks' asset quality metrics, with net charge-offs now
approaching pre-crisis levels," said Moody's.
However, the ratings agency noted "low interest rates also
harm U.S. banks' pre-provision earnings in both the near- and
medium-term. Most immediately, low rates reduce a key source of
profitability - banks' net interest margins. In addition, low
rates encourage looser loan underwriting standards as banks seek
out higher return, and consequently higher risk, assets. This
will result in greater credit costs, reducing pre-provision
earnings, in the future."
Year-to-date, IYF, VFH and XLF are up an average of 20.2
percent with XLF leading the way with a gain of 20.8 percent.
With $13.56 billion in assets under management and an expense
ratio of 0.18 percent, XLF is the largest and least expensive ETF
tracking U.S. banks and financial services firm. VFH has an
annual fee of 0.19 percent.
All three funds have similar holdings with familiar names such
as J.P. Morgan Chase (NYSE:
), Wells Fargo (NYSE:
) and Warren Buffett's Berkshire Hathaway (NYSE: BRK-B) appearing
among the top-10 lineups of each ETF.
Other top-10 holdings in the ETFs include Dow components
American Express (NYSE:
) and Bank of America (NYSE:
) along with Goldman Sachs (NYSE:
). VFH has the most holdings with 515.
For more on ETFs, click
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