The financial sector has pumped up profits this year thanks to
an improving job market, recovering housing fundamentals and
increasing consumer confidence. Though Q3 was not as strong as Q2
due to disappointing performance by
Goldman Sachs (
J.P. Morgan (
, it generated solid earnings growth of 9.9% with a beat ratio of
Financial ETFs in Focus on Earnings
In fact, the broker-dealer/capital markets segment is leading the
way higher in the broad financial sector with 22.7% earnings growth
in Q3 and the trend is likely to continue to close out 2013. This
corner of the market has already suffered the Fed's 'no taper'
shocker but is again drawing interest as speculations of a stimulus
cut soon have resurfaced.
The segment is expected to be the clear beneficiary of this policy.
This could be especially true for banking institutions as a steeper
yield curve would lead to more money from a wider spread between
short-term rates for deposits and longer-term rates for loans.
In addition, greater volatility in the markets would help asset
managers to bring in more capital, while many of the exchanges like
ICE, NYSE or CME would benefit from more financial market activity.
This suggests bullish trends all around for the space, in
particular the broker-dealer/capital markets segment (read:
Top Ranked Financial ETF in Focus: VFH
Given these promising trends in the space, investors could take a
look at the following ETFs for their exposure to the financial
sector. Any of these could be an interesting choice as long as the
taper is discussed or if it is actually implemented.
PowerShares KBW Capital Markets Portfolio ETF (
This ETF follows the KBW Capital Markets Index, which measures the
performance of these companies that do business as broker-dealers,
asset managers, trust and custody banks or exchanges. It has
amassed about $9 million in its asset base while volume is very
light, probably increasing the total cost for this unpopular fund
beyond the expense ratio of 0.35%.
With holdings of 24 stocks, the product is slightly concentrated in
its top 10 holdings as it puts 59.4% of assets in them. Morgan
), State Street and Goldman Sachs occupy the top three spots with a
combined 26.3% share in the basket.
The ETF has added about 40% year-to-date and currently has a Zacks
ETF Rank of 2 or 'Buy' rating, with a 'Medium' risk outlook (read:
3 Surging Financial ETFs Beating the Market
SPDR S&P Capital Markets ETF (
This fund tracks the S&P Capital Markets Select Industry Index,
holding 53 stocks in its portfolio. Asset management & custody
banks take the top position in the basket at 63.51% while
investment banking & brokerage takes the remaining share in
term of the industry profile.
With respect to holdings, none of the securities make up more than
3.36% share, suggesting spread out exposure. Further, the fund is
widely diversified across various market spectrums with large caps
accounting for 37%, small cap at 36% and mid cap at 25%.
The product manages assets worth $76.3 million in AUM while average
volume is relatively light. The ETF charges a low fee of 35 basis
points a year.
The ETF is up 37.4% so far this year and has a Zacks ETF Rank of 3
or 'Hold' rating, with a 'Medium' risk outlook.
iShares Dow Jones US Broker-Dealers ETF (
This fund provides exposure to the investment services segment of
the broad U.S. financial sector by tracking the Dow Jones U.S.
Select Investment Services Index. The product currently holds 23
securities and invests around 59% of total assets in its top 10
holdings. GS, MS and Schwab Charles (
) occupy the top three positions in the basket.
The ETF is appropriate for investors looking to get exposure to
brokerage firms, dealers and other facilitators directly involved
in the capital markets. The fund has accumulated $154.5 million in
AUM while it sees good volume of nearly 80,000 shares a day. The
product charges 45 bps in fees per year from investors (read:
Why IAI Is a Great Financial ETF
IAI had a strong run this year, gaining nearly 51% in the
year-to-date time frame. The fund currently has a Zacks ETF Rank of
2 or 'Buy' rating, with a 'Medium' risk outlook.
These three products have clearly outpaced the broader S&P
Financial Select Sector SPDR Fund (
) and SPDR S&P 500 (
) by wide margins and show room for further upside (see:
all the Financial ETFs here
Any of the three may be a lucrative pick if the economy continues
to improve and if the Fed starts scaling back its asset purchases.
Further, any pickup in initial public offerings, mergers and
acquisitions, trading and asset management resulting from a
strengthening economy would support continued growth for this in
focus industry which may have more room to run.
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GOLDMAN SACHS (GS): Free Stock Analysis Report
ISHARS-US BR-D (IAI): ETF Research Reports
JPMORGAN CHASE (JPM): Free Stock Analysis
PWRSH-KBW CMP (KBWC): ETF Research Reports
SPDR-KBW CAP MK (KCE): ETF Research Reports
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