investing

Don’t Give Up on Financial Stocks

Financials are having a volatile year, but investors should remain patient with them — and consider Financial Select Sector SPDR, one of our favorite ETFs.

A strong economy and rising interest rates should be lifting financial stocks. But the Financial Select Sector SPDR (XLF) exchange-traded fund was up just 2.9% over the past 12 months, lagging Standard & Poor’s 500-stock index by nearly eight percentage points. It’s been a bumpy ride, too. Were it not distressing for investors, the volatility would be “comical,” says CFRA strategist Lindsey Bell.

In recent months, financial stocks have meandered up and down. They rallied, for instance, ahead of a late-September rate hike by the Federal Reserve, only to drop afterward as inflation fears kicked in. A week later, shares were up again in response to a widening of the so-called yield curve—the difference between rates of the 10-year and two-year Treasury notes. (A narrowing gap can trigger recession fears.) Days later, in mid October, after several big banks reported third-quarter earnings, some shares were up and others floundered.

Bell, who has a neutral outlook for the sector, finds little to get excited about with regard to financial firms. Stock prices already reflect the potential boost from rising rates, says Bell. Loan growth has been weak and trading volume and investment banking fees have been “muted,” she adds.

Financial Select Sector SPDR has seen mixed results among its holdings as certain pockets of the financial sector have done better than others. The ETF tracks an index of 67 financial companies, including big banks and regional banks, brokerage and investment management firms, consumer finance companies, and insurers. Consumer finance and diversified financial firms outperformed investment and insurance companies over the past year, on average. Shares of two of the fund’s biggest holdings, JPMorgan Chase and Bank of America, both gained 14% over the past year. Some smaller stakes have been a drag, including two asset management firms—Invesco (which slipped 43% over the past 12 months) and Affiliated Managers Group (down 36%)—and insurance firm Brighthouse Financial (down 29%).

Still, we think investors should remain patient with financial stocks, and we’re keeping this fund in the Kiplinger ETF 20, the list of our favorite ETFs. The near-term earnings outlook for financials is rosy, in part because the sector is a major beneficiary of cor­porate tax reform. For the fourth quarter of this year, CFRA expects financial stocks to report an average 31% increase in quarterly earnings compared with the year before.

Next year, earnings growth at financial firms is expected to taper to 10%, in line with expectations for the S&P 500. Even so, Wells Fargo Investment Institute says financial stocks are attractively priced. Financial stocks trade at an average price-earnings ratio of 12, based on earnings estimates for the coming 12 months. That’s one of the lowest P/Es of the 11 sectors in the S&P 500, which trades at a P/E of 16.

Most Popular

Top Bear Market Tips from 10 Financial Advisers
investing

Top Bear Market Tips from 10 Financial Advisers

When a bull market turns into a bear market, it can be hard to know what to do. Take comfort in the guidance of 10 financial professionals.
June 30, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
The 15 Best Stocks for the Rest of 2022
stocks to buy

The 15 Best Stocks for the Rest of 2022

The lesson of the past two years: Be ready for anything. Our 15 best stocks to buy for the rest of 2022 reflect several possible outcomes for the seco…
June 21, 2022

Recommended

Protect Your Portfolio: 10 Defensive ETFs
ETFs

Protect Your Portfolio: 10 Defensive ETFs

Want to prevent a further portfolio beating across the rest of 2022? These defensive ETFs can provide some market cover.
July 1, 2022
Is the Stock Market Closed for the Fourth of July in 2022?
Markets

Is the Stock Market Closed for the Fourth of July in 2022?

Independence Day falls on a Monday in 2022, so the bond and stock markets will enjoy a long holiday weekend. Here's a look at the markets' holiday hou…
July 1, 2022
Top Bear Market Tips from 10 Financial Advisers
investing

Top Bear Market Tips from 10 Financial Advisers

When a bull market turns into a bear market, it can be hard to know what to do. Take comfort in the guidance of 10 financial professionals.
June 30, 2022
Move Over ETFs: Direct Indexing Is an Investment Strategy Worth Paying Attention to
investing

Move Over ETFs: Direct Indexing Is an Investment Strategy Worth Paying Attention to

More flexibility, more control, the potential for higher returns and tax-reducing strategies: With pros like that, could direct indexing be right for …
June 25, 2022