Is It Finally Time To Consider Financial ETFs?

The Financial Select Sector SPDR XLF, the largest financial services exchange traded fund by assets, tumbled 13 percent last year, underscoring the sector's status as one of the worst-performing groups in the S&P 500.

Moreover, financial services stocks and ETFs were epic disappointments. Expectations were in place for the sector to benefit from rising interest rates, but even as the Federal Reserve obliged with four 2018 rate hikes, financials flailed.

What To Know

XLF targets the Financial Select Sector Index and “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,” according to State Street.

Following a rough year for XLF and rival financial services ETFs, some analysts are bullish on the fund. AltaVista Research has an Overweight rating on the $23.79 billion XLF. The firm's Overweight ratings implies “above average appreciation potential.”

“Typically, funds in this category consist of stocks trading at attractive valuations and/or having above-average fundamentals,” said AltaVista.

Why It's Important

For over a year, the financial services sector, the third-largest sector weight in the S&P 500, has been widely framed as a value play. AltaVista estimates XLF's price-to-book ratio to be 1.1 and its price-to-earnings ratio to be 10.4. Both are well below the comparable metrics on the S&P 500. Using those metrics, XLF is also the least expensive of the 11 sector SPDR ETFs.

XLF is one of just three sector SPDR ETFs AltaVista has an Overweight rating on.

“Higher interest rates, tax cuts, regulatory relief and faster GDP growth should all help Financials sustain higher margins and ROE into 2019E, though estimates took a big hit on recent market volatility,” said the research firm. “Nonetheless with P/E multiples at their lowest point in 5 years our ratings framework suggests the sector looks attractive vs the S&P 500, and sell-side analysts' ratings have been improving as well.”

What's next for XLF and rival funds are a slew of fourth-quarter earnings reports. XLF holds 68 stocks. Starting this week and over the subsequent two weeks, the bulk of XLF's marquee components will report fourth-quarter results.

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