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The US stock market is highly complacent about trade fears as the S & P 500 and the Dow Jones reach new heights. While most sectors have rallied, some are lagging behind and finance is one of them. However, this seems to be the right time to enter this sector of stocks and ETFs.
Below, we have highlighted some strong reasons for the outperformance of the broader sector:
Rising rate
Rates have risen this year as yields on 10-year Treasuries exceed 3% and 2-year yields are close to 2.8% in 10 years. The upward trend is expected to continue as rising trade in tariffs will lead to higher consumer prices for products, thereby fueling inflation.
Trump imposed the second set of tariffs of 10% on the 200 billion dollars of Chinese products as of September 24th. Taxes will be increased to 25% from January 1st. worth $ 60 billion. The new Trump tariff will add to the $ 50 billion already in place with a 25% fee. China has responded by imposing tariffs equivalent to the amount of US exports. Apart from this, Trump also threatened a third round of tariffs on 267 billion additional dollars of Chinese imports in a short time, which would mean the collection of duties on almost all that China exports in the USA.
In addition, the Fed has raised interest rates twice this year and is expected to make a third rally next week. Another hike is planned for December. According to the CME Group's FedWatch tool, market expectations for a rate hike this month are above 90% (read: rising rate hike in September: selecting the best ETFs and sectoral securities ).
A rising interest rate scenario is very profitable for the financial sector because it will increase the profits of banks, insurance companies, discount brokerage firms and investment managers. # 39; s assets.
Trump Action
Trump overturned some financial regulations, dismantling the Dodd-Frank law, which was passed as a result of the financial crisis and undermined some of the banks' business lines. Easier regulation will undoubtedly increase the profitability of companies, especially banks, and stimulate dividends and redemptions (read: ETFs and regional bank shares should be part of Dodd-Frank Easing).
Encouraging fundamentals
The combination of some other factors also bodes well for the financial sector. Accelerating economic growth, strengthening the labor market, increasing consumer confidence and healing the housing market could lead to increased demand for loans and all types of financial services. In addition, higher oil prices act as catalysts, as most banks are highly exposed to the energy sector.
Impressive gains
According to the latest trends, financial results posted impressive growth of 21.3% in the second quarter and are expected to increase by 33.1% in the third quarter, which represents S & P 500's fourth contribution to earnings (see here all Financial ETFs).
Evaluation
The financial sector underperformed the market this year, having lost 0.3% so far. Lower prices made it attractive for investors because the sector is currently trading at 13.83 P / E versus 18.28 for the S & P 500 Composite Index. The beta is also low at 0, 62 versus 0.99 for the S & P 500. All these indicators suggest that the sector has room for the coming months.
The best ETFs to consider
Given the reasons outlined above, we strongly believe that investors should consider financial ETFs. We have highlighted six ETFs with the best Zacks # 1 (Strong Buy) or # 2 (Buy) rankings.
SPDR Selection Fund for the Financial Sector (XLF – Free report)
It is the most popular financial ETF in space with $ 31.9 billion outstanding and an average daily volume of nearly 53.7 million shares. The fund tracks the Financial Select Sector Index, holding 67 stocks in its basket. It is highly concentrated on the first two companies, which collectively represent 24% of the portfolio, while the other companies hold no more than 8.5% of the capital. In terms of industrial exposure, banks rank first at 44.5%, while capital markets, insurance and diversified financial services each offset a double-digit exposure. The fund receives annual fees of 13 basis points and an increase of 4.6% since the beginning of the year. It has a Zacks ETF No. 2 ranking with a medium risk perspective.
SPF S & P Regional Banking ETF (KRE – Free report)
This fund targets the regional banking sector of the financial sector and follows the S & P index of regional banks. It holds 124 shares in its basket, none representing more than 1.94% of the assets. KRE is one of the largest and most popular ETFs in the banking space with assets under management of $ 5.1 billion and an average daily volume of about $ 5.6 million. # 39; s shares. It charges 35bp a year in fees and has added 7.6% so far this year. The product has a rank Zacks Zacks # 1 with a high risk perspective.
SPDR S & P Bank ETF (KBE – Free report)
This fund offers a weight exposure equal to 80 banking stocks by following the S & P Banks Select Industry Index. Regional banks dominate the portfolio with a share of 76.7%, while mortgage and mortgage lending, diversified banks, asset management and custody banks and other diversified financial services take the lead. rest. She has amassed $ 3.6 billion in assets and holds the ZFS ETF Zacks rank with a high risk perspective (read: The best ETFs and first-tier stocks should explode).
ETF iShares U.S. Broker-Dealers & Securities Exchanges (IAI – Free report)
This fund offers exposure to US investment banks, discount brokers and brokerage firms by following the same pattern. Dow Jones US Select Investment Services Index. The product currently holds 27 titles, the largest allocation going to the top five companies that collectively account for 45.8% of the portfolio. It has accumulated $ 328.5 million in assets under management and trades in moderate volume of nearly 78,000 shares a day. The product charges investors 43bp per year and has risen 4.8% since the beginning of the year. It has a Zacks ETF No. 2 ranking with a high risk perspective.
ETF S & P Financials Revenue (RWW – Free report)
This ETF provides investors with targeted access to the same securities as the S & P 500 Financials Index, but weighs each security by income rather than by market capitalization. It holds 69 shares in its basket with a higher concentration on the first company at 16.4%, while other companies account for less than 8% of assets. The product did not attract investors' attention, as shown by its $ 59.5 million in assets under management and its average daily volume of 3,000 shares. It has an expenditure ratio of 0.45% and has added 2.9% so far this year. The fund has a Zack Zack # 2 ranking with a medium risk perspective (read:
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