Tired of just energy stocks rising this year? There's a new S&P 500 sector to watch: Financials. And ETFs can help you participate in the rally.
The Financial Select Sector SPDR ETF is up nearly 5% from Oct. 12, the start of the S&P 500's most recent rally. That ranks financials as the No. 2 sector in that time, just behind energy's 5.1% surge.
Additionally, many of the top percentage gainers in the S&P 500 during this recent rally are large banks due to strong third-quarter earnings reports. Shares of Bank of America are up more than 13% since this rally kicked off. That's been enough to add more than $30 billion in market value to the stock. The S&P 500 is in this time is up just 3.2%.
Strong results from financials are driving stocks higher. "Wall Street is starting to find its footing as investor Fed tightening fears eased and after both strong banking earnings from Goldman Sachs and Bank of America," said Edward Moya, analyst at Oanda.
Financial Earnings Spark Rally
Financial shares went into hyperdrive following several positive earnings results for the third quarter. For instance, Bank of America's Oct. 17 report of third quarter earnings that topped expectations by nearly 4%. The bank is benefiting from higher interest rates.
"The highlights of this quarter were also once again marked by good organic customer activity," said BofA CEO Brian Moynihan in a quarter earnings call with investors. "This was coupled with a significant increase in net interest income."
Using ETFs To Join Financial Stock Rally
If you simply own ETFs that track the S&P 500, you own financial stocks already. Just maybe not as much as you'd like.
Thanks to the recent rally in financials, and underperformance of technology, financials now account for 11.3% of the S&P 500. That gives the sector as the fourth-largest weighting in the index. But some investors may prefer a heavier allocation. And several ETF strategies allow that.
The first, most gradual approach would be to tilt your portfolio toward value stocks, says Todd Rosenbluth, head of research at VettaFi. "Financials tend to be more heavily weighted in value ETFs," he said. For instance, the $22 billion-in-assets iShares S&P 500 Value and the nearly $50 billion-in-assets iShares Russell 1000 Value carry a up to 19% weight in financial stocks.
The largest single position in iShares S&P 500 Value is a financial stock: Warren Buffett's Berkshire Hathaway. The diversified investment company holds a 3.1% weight in the index. JPMorgan Chase is the next largest financial holding in the ETF at 1.1%.
Drilling Down Into Financials
But there are additional ETF options for investors looking for a more concentrated play in financials.
One of the top options is Financial Select Sector SPDR, Rosenbluth says. It's a $29 billion-in-assets ETF that owns financial stocks only and weights them based on market value. Berkshire Hathaway is the ETF's top holding, too, at 14.4%. But the ETF rounds out the top three holdings with a 9.9% position in Bank of America and 6.7% weight in JPMorgan Chase. "(It's a) market cap weighted fund for those that want to smoothly overweight the sector while owning the S&P 500. It is diversified across industries and relatively inexpensive," Rosenbluth says.
But you can slice the financial industry even more finely. The Invesco KBW Bank ETF zeros in on large cap banks with hefty exposure to JPMorgan, BofA, Wells Fargo and U.S. Bancorp, Rosenbluth says. And SPDR S&P Bank diversifies further. It "is an equally weighted bank ETF with healthy mix of small and large cap banks," he said. Here you'll find exposure to smaller banks like Cullen/Frost Bankers and First Horizon.
Financials' rally may not hold. The sector is still down nearly 20% this year. And energy is still the only S&P 500 sector up on the year. But the rally in financials is still noteworthy.
Financials are "perceived as benefiting from a rising rate environment where the U.S. economy avoids a recession. Investors that see such a scenario should look to boost exposure," Rosenbluth said.
Top Financial Stock Gainers In Recent Rally
Largest percentage gains in Financial Select Sector SPDR from recent Oct. 12 S&P 500 low
| Name | Ticker | Weight in ETF | YTD stock % ch. | Stock % ch. from low |
|---|---|---|---|---|
| Bank of America | 6.9% | -23.9% | 13.4% | |
| JPMorgan Chase | 9.9 | -26.6 | 12.1 | |
| Travelers Companies | 1.1 | 11.3 | 9.4 | |
| BlackRock | 2.5 | -37.0 | 8.6 | |
| American International Group | 1.1 | -7.3 | 7.7 | |
| Wells Fargo | 4.8 | -9.3 | 7.5 | |
| MetLife | 1.3 | 7.4 | 7.3 | |
| State Street | 0.7 | -30.6 | 7.2 | |
| Everest Re Group | 0.3 | 2.1 | 7.2 | |
| Citizens Financial Group | 0.5 | -22.5 | 7.1 |
Sources: IBD, S&P Global Market Intelligence
Follow Matt Krantz on Twitter @mattkrantz
