Better-than-expected results from the big banks may give
listless financial-sector ETFs just the jolt they need.
Wells Fargo (
) announced on July 11 that its second-quarter earnings met
expectations and that revenue beat analyst estimates. Later
reports from its peers, such asCitigroup (
),JPMorgan Chase (
) andGoldman Sachs (
), continued the favorable trend.
The latter three gained 4% to 5% last week, helping improve
their lagging IBD Relative Strength Ratings. Wells, already
boasting the highest RS of the four, ended the week nearly
"These recent earnings statements appear to have reignited a
spark within this subsector, and asset flows into this space have
increased," said Nathan Kubik, a principal of Carnick &
Kubik, which manages $300 million in assets.
While investors are likely to reward the results in the short
term, that could change, given concerns about "the exposure these
big banks have to shifts in the yield curve," he added.
Compared with 2013 and the
, ETFs offering broad exposure to the U.S. financials sector have
lagged this year.Financial Select Sector SPDR (
) has risen 5.6%,Vanguard Financials (VFH) climbed 5.6% and
iSharesUS Financials (IYF) is up 5.2%.
By comparison, they gained 35.5%, 32.9% and 34%, respectively,
Top holdings of the funds include banking heavyweights Wells
Fargo, Citigroup, JPMorgan Chase,Bank of America (BAC),U.S.
Bancorp (USB), Goldman Sachs andBlackRock (BLK).
The cushion provided by those stocks is part of why
broad-based financial ETFs
have outperformed some more specialized ETFs, such as those
tracking smaller banks, since earlier this year, according to
Neena Mishra, director of ETF research at Zacks Investment
Research. Investment banks have benefited from strong
underwriting and M&A activities, she says. Rising equity
markets have helped drive asset managers. But major subindustries
within the sector, including smaller banks and insurance, are
expected to show year-over-year earnings declines.
"One of the most important sources of income in recent years
-- the mortgage refinance boom -- is now almost over," Mishra
This year,SPDR S&P Regional Banking (KRE) is down 3.4% vs.
a 47.5% gain in 2013.
IShares US Regional Banks (IAT) has climbed 2.3% vs. 37.7%
And SPDR S&P Mortgage Finance (KME) is off 0.74% in 2014
after rising 32.5% the year before. Its top holdings include
mortgage, homebuilding and insurance companies such asRyland
Group (RYL),D.R. Horton (DHI) andXL Group (XL).
The banking industry continues to face fallout from the 2008
financial crisis, including stricter regulations and a rise in
Market analysts also worry about limited opportunities to lend
profitably in a slow economy. Still, "banks are in much better
health now with solid capital levels" because of closer oversight
and cost-cutting measures, Mishra said. "Interest rates should
start inching up in the months to come, which will benefit
Meanwhile, insurers may offer medium-term
opportunities for investors
. Despite bland performance year to date, insurers are attractive
based on valuation and expected returns, and "are well positioned
for the next 12 months," Kubik said.