ETF Trends CEO Tom Lydon discussed the Financial Select Sector SPDR (XLF ) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.
This ETF, one of the powerhouse SPDR products, provides exposure to an index that includes companies from the following industries: diversified financial services; insurance; commercial banks; capital markets; real estate investment trusts; thrift & mortgage finance; consumer finance; and real estate management & development. XLF contains the who’s-who of the domestic economy’s financial players, including JP Morgan, Wells Fargo, and others. This makes it an ideal play on the U.S. financials world, which has not always been stable.
So, it’s A big week for banks as the quarterly earnings season takes off. XLF includes an 11.9% position in JPM, 4.0% in C, and 4.0% in WFC. Banks were dealt a rough hand in 2020 but are starting to recover lost ground.
JPMorgan was the 7th worst-performing stock on the Dow in 2020 but was the 3rd best in 2019. A new accounting rule dubbed the “Current Expected Credit Losses” went into effect at the start of 2020, forcing banks to book expected loan losses upfront, weakening profits. Then the coronavirus hit, and the shutdowns spurred fears of a wave of bad loans.
Vaccine rollouts are now fueling bets of an economy returning normal by the second half of 2021. Additionally, the recent Georgia runoff election resulted in a Democratic party win. Wall Street believes the Democrat-controlled Congress to be a good outcome for bank stocks.
Contrary to the past, a Democratic party controlled government is usually not a good sign due to potentially tougher regulations and higher tax rates. Many are focusing on the greater likelihood of Congress passing through a big fiscal spending measure to further bolster a flagging economy that continues to be weighed down by the ongoing resurgence in coronavirus cases. Additionally, many do not believe President-elect Joe Biden will hike corporate taxes right as the country tries to shake off the coronavirus pandemic.
The bond markets are also seeing the yield curve steepen or rising long-term rates so that banks can enjoy a larger gap between short-term deposit rates and long-term loan rates.
What’s in Store for these Wall Street Banks?
JPMorgan, the largest U.S. bank by assets, performed better than peers during a tumultuous 2020. Analysts see more upside in the lender as economic conditions improve during 2021. It is expected to be one of the banks better positioned to benefit from improved credit conditions. Plus, BofA Securities and Jefferies both upgraded JPM as tailwinds offset relative weakness elsewhere.
Citigroup is a solid value play at this time and will most likely produce nice returns from stock growth and dividends over the coming years. Analysts have recently become bullish on the company’s earnings prospects.
Wells Fargo is breaking out of a period of consolidation. It isn’t expensive based on historical or relative multiples, still trading below its two-year forward price to tangible book value.
With that in mind, XLF tracks the performance of the Financial Select Sector Index. As alluded to above, the fund seeks to provide precise exposure to companies in the diversified financial services; insurance; banks; capital markets; mortgage real estate investment trusts (“REITs”); consumer finance; and thrifts and mortgage finance industries.