ETF of the Week: Davis Select's Financial ETF, DFNL

DFNL is an actively managed portfolio of global financial sector stocks. The fund seeks long-term growth of capital.The financial sector has more room to run. The sector is safer than ever with proven durability, steady compounding machines, attractive valuations, potential underearnings, and attractive dividends and buybacks. Banks look durable with greater capital allocations that have helped limit their downside risks.

Over the past year, banks were required to increase capital to hedge against potentially bad loans that would bite back over the course of the coronavirus pandemic. However, these bad loans never materialized, which has left banks with more capital to deploy elsewhere. After the recent stress test, the Federal Reserve removed the post-Covid capital requirements on banks, which could allow them to redistribute capital back to shareholders through dividends and buybacks.

The financial sector is seen as a steady compounding machine. The S&P Financial Index has exhibited a 6% 5-year cumulative earnings per share growth since the 1990s.

Looking at valuations, financials are attractively priced. The S&P 500 financials sector is the most attractively priced among the various market sectors with a 14.9 forward price-to-earnings ratio. In comparison, the consumer discretionary sector was trading at around a 34.9 forward P/E and the technology sector showed a 25.8 forward P/E.

Furthermore, financials relative P/E scores are hovering below their 10-year averages. While financials earnings per share have grown faster than the S&P 500 index, financial stocks prices continue to fall behind the broader index – lots more room to catch up. Normalizing interest rates would increase financial sector earnings due to the sector’s positive sensitivity to higher interest rates.

This article originally appeared on ETFTrends.com.