The Federal Reserve's loose monetary policy and resulting low
interest rates have pushed many investors to shift their asset
base to riskier investments. This is evident from the heavy
inflow of assets in equities in 2013. As a result, most of the
equities have moved higher only to break records or reach new
This increased focus of investors in risky assets also bears
testimony to the recent rally on Wall Street. The month of March
has been pretty good for the U.S. stock market as the Dow Jones
Industrial Average, experienced a ten day winning streak, the
first time such a streak has taken place in decades.
Furthermore, the broad S&P 500, as represented by the
SPDR S&P 500 ETF (
also was moving higher and is now just a few points below its Oct
9, 2007 peak (
3 Foreign ETFs Still Beating the S&P 500
). This kind of stock price movement is pretty rare in the
history of Wall Street, and has signaled to many that a new bull
market is underway.
A Glimpse on Valuation
However, in an attempt to go higher and reach above the
all-time highs, the valuation of the S&P 500 has resultantly
crept higher. The P/E ratio of S&P 500 currently stands at
Forget SPY, Focus on Mid and Small Cap ETFs
On the contrary, investors should note that two sectors that
started the year on a strong note and still continue to reward
investors with huge gains have cheaper valuations as compared to
the broader market index.
Financials and energy are the two sectors that have not only
provided investors with a handful of profits but are also pretty
inexpensive compared to other industries.
Financial Select Sector SPDR (
Energy Select Sector SPDR (
have both performed remarkably well since the start of the year
and continue to deliver strong gains.
In fact, both
have beaten the S&P 500 in terms of year-to-date gains. While
S&P 500 has gained 9.43% in the year-to-date period, XLF
returns stand at 12.57% while XLE has returned 11.45%.
Indeed it is not just the multi-year gains which are
attracting investors towards XLF and XLE. These sectors are also
two that have relatively modest valuations that are attracting
investments. Both XLE and XLF appear to be cheap relative
to the broader U.S. market as indicated by their respective P/E
Time to bank on Regional Bank ETFs
XLF highlights the low valuation of financial stocks and has a
P/E ratio of 12.36, while XLE provides exposure to energy stocks
has a P/E of 12.89.
A Quick Look at the Financial Sector ETF
XLF was one of the best performing ETFs in 2012 attributable
to the strong performance of banking stocks in the last one-year
period. The ETF started the year on a strong note further fueled
by strong earnings posted by most of the U.S. banks (
Banking ETFs 101
Progress seen in the past one year gives a clear growth
indication for the U.S. banking sector. Besides contraction in
provisions for credit losses and cost containment, a marked
recovery in the equity markets and consequent revenue growth led
most of the banks to report higher-than-expected earnings.
Expanding consumer credit and overall improvement in lending
activity made it easy for the banks to sustain the
In fact, U.S. banks are poised for further growth in 2013 with
uninterrupted expense control, sound balance sheets, an uptick in
mortgage activity and lesser credit loss provisions.
Moreover, a favorable equity and asset market backdrop,
progressive housing sector and an accommodative monetary policy
are expected to make the road to growth smoother (
Homebuilder ETFs: Can the Rally Continue?
However, it should also be noted that though improved economic
data such as higher consumer spending and gross domestic product
(GDP), improving housing market and a declining unemployment rate
point towards optimism, a paltry interest-rate environment is
disturbing for the sector.
In such a scenario, an investment in XLF seems prudent with
financial stocks exhibiting cheaper valuations. XLF is one of the
popular ETFs tracking the financial sector and has been in the
limelight attributable to its remarkable performance. The ETF is
continuously trying to break out from its highs post-crisis.
The fund manages an asset base of $7.6 billion and trades at
volume levels of more than 49 million shares a day.
XLF is home to 83 financial stocks with JPMorgan Chase,
Berkshire Hathaway and Wells Fargo comprising the top three
holdings with asset allocation of 8.64%, 8.46% and 8.07%,
respectively. The fund charges a fee of 18 basis points.
Time for an Energy Sector ETF?
While the growth momentum is likely to sustain in the
financial sector in 2013, the energy sector also appears to be
well poised for 2013. When 2012 turned out to be the worst hit
for energy-based ETFs due to a sluggish oil market, a rebound in
energy prices in the second half gave some life to energy ETFs (
Time to Buy Energy ETFs?
Moreover the recovery continued into 2013 with the sector
posting huge gains to date. This may be due to mounting oil
prices. A remarkable rise in oil production in the U.S. once
again lured the global energy firms to the U.S. market. And it
appears that the current boom in oil production should continue
which should further strengthen energy ETFs going forward.
So a sector with strong fundamentals and cheaper valuations
make an ideal area for investment this year. In this context, XLE
is one of the more popular ways to tap the energy sector.
Given the current boom in oil prices and the bullish trend in
oil production in the U.S., this ETF represents an effective way
to capitalize on this strength as oil companies play a
substantial role in the performance of the fund (
5 Sector ETFs Surging to Start 2013
Oil Gas & Consumables Fuels companies form 79.13% of the
ETF portfolio while the rest goes to energy equipment &
services. The high level of concentration in the oil sector
companies has been a boon for the fund at this point of time.
The fund is home to 45 stocks in which it invests an asset
base of $7.6 billion. The fund appears to be highly concentrated
as it is 60.9% dependent on the top ten holdings for its
performance. In fact, two oil giants Exxon and Chevron take away
nearly 32% of the asset base. The fund charges a fee of 18 basis
Want the latest recommendations from Zacks Investment
Research? Today, you can download
7 Best Stocks for the Next 30 Days
Click to get this free report >>
SPDR-SP 500 TR (SPY): ETF Research Reports
SPDR-EGY SELS (XLE): ETF Research Reports
SPDR-FINL SELS (XLF): ETF Research Reports
To read this article on Zacks.com click here.
Want the latest recommendations from Zacks
Investment Research? Today, you can download 7 Best Stocks for
the Next 30 Days. Click to get this free report