Just a few months ago, financials, and bank stocks in particular, were viewed as untouchable in the wake of March’s banking crisis, spurred by the collapse of Silicon Valley Bank. In an illustration of how quickly sentiment can change in the stock market, all of a sudden, sentiment towards financials and banks seems to be picking up, bolstered by strong earnings reports from the likes of Charles Schwab (NYSE:SCHW), Morgan Stanley (NYSE:MS) and Bank of America (NYSE:BAC).
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With this sector of the market looking like it is ready for a rebound, it could be a good time for investors to take another look at the Financial Select Sector SPDR ETF (NYSEARCA:XLF).
Why are Financial Stocks Bouncing Back?
This week, a number of top names in the space have reported impressive results, buoying the financial sector as a whole. While Charles Schwab’s earnings per share and revenue fell year-over-year, they beat analyst expectations, causing the stock price to close 12.57% higher yesterday, the largest gain for any stock in the S&P 500 (SPX). The asset manager also reported that it added one million new brokerage accounts during the quarter, while client assets climbed to above $8 trillion, up from $7.58 trillion at the end of the first quarter.
Schwab wasn’t alone in posting a big gain on Tuesday. Like Schwab, Morgan Stanley’s earnings per share and revenue also fell year-over-year but handily beat analyst expectations while the investment bank and financial services company also posted record revenue from its Wealth Management division. Shares of Morgan Stanley closed 6.45% higher yesterday. Bank of America also beat analyst expectations, thanks to rising net interest income, leading shares of the bank to gain 4.42%.
What is the XLF ETF?
These stocks all seem to be turning a corner and could help to lead a rebound in the sector as a whole — and all three are held by XLF. XLF is part of State Street Global’s (NYSE:STT) popular Sector SPDR ETF series, and it invests in the financial sector of the S&P 500, which includes banks, financial services providers, mortgage companies, companies engaged in capital markets, and more.
XLF has $33.8 billion in assets under management (AUM) and features a very reasonable expense ratio of just 0.1%. This means that an investor putting $10,000 into XLF today will pay just $10 in fees in the first year and $128 over the course of a 10-year investment (assuming fees remain constant and the fund returns 5% per annum). XLF pays a dividend and currently yields just under 2%.
XLF’s Portfolio Overview
Bank of America and Morgan Stanley both occupy prominent spots within XLF’s top 10 holdings, while Charles Schwab makes it to the top 20 holdings. All told, XLF holds 73 stocks, and its top 10 positions make up 55.6% of the fund. Below, you can take a look at XLF’s top 10 holdings using TipRanks’ holdings tool.
Because of its massive $751 billion market cap, the class B shares of Warren Buffett’s Berkshire Hathaway (NYSE:BRK.B) are XLF’s largest position, with a 12.96% weighting. Berkshire Hathaway is closely followed by JPMorgan Chase (NYSE:JPM), the world’s largest bank, which has a 9.46% weighting, and payment networks Visa (NYSE:V) and Mastercard (NYSE:MA), which boast weightings of 8.33% and 7.1%, respectively.
The aforementioned Bank of America rounds out the top five holdings with a 4.3% weighting. Other notable holdings include Wells Fargo (NYSE:WFC), another global systemically important bank, S&P Global (NYSE:SPGI), the provider of the S&P 500 and Dow Jones (DJIA) indices, institutional asset manager BlackRock (NYSE:BLK), which boasts over $8.5 trillion in AUM, and prominent investment bank Goldman Sachs (NYSE:GS).
Even after many of these stocks have now rallied off of their recent lows, an attractive aspect of XLF’s group of holdings is that many of them still offer attractive valuations. As of the end of June, XLF’s average price-to-earnings multiple was 14.2, which is a decent discount to the broader market, where the S&P 500 has a price-to-earnings multiple of approximately 20.
Many of these stocks also feature attractive dividend yields, enabling XLF to offer its current dividend yield of 2%. While it isn’t necessarily an eye-catching dividend yield, it is more than the average yield for the S&P 500, which stands at just 1.5% after the index’s strong rally in 2023. Furthermore, XLF has paid its investors dividends for an impressive 23 consecutive years.
Is XLF Stock a Buy, According to Analysts?
Turning to Wall Street, XLF has a Moderate Buy consensus rating, as 55.26% of analyst ratings are Buys, 38.50% are Holds, and 6.24% are Sells. At $38.19, the average XLF stock price target implies 8.9% upside potential.
XLF’s Long-Term Performance
While XLF has given its investors a roller-coaster ride in recent times, it has actually generated better overall total returns than one might expect over the long run. As of the end of the most recent quarter, XLF had a quietly good three-year annualized total return of 15.5%, a less impressive five-year annualized total return of 7.1%, and a respectable, double-digit 10-year annualized return of 10%.
This three-year return actually beat the overall S&P 500’s three-year return of 14.6% over the same time frame, although it lagged its five-year and 10-year returns of 12.3% and 12.8% using the Vanguard S&P 500 ETF (NYSEARCA:VOO) as a proxy for the S&P 500.
Sentiment is Improving
A few months ago, the market couldn’t have been more bearish on financial stocks. This was certainly understandable, as the sector was facing serious challenges, and several regional banks failed. However, as we move further away from the aftermath of the banking crisis, it seems that banks may be out of the woods in terms of the worst fears that investors had about the sector, and sentiment seems to be rebounding.
Leading financial companies are posting solid earnings results, propelling the sector higher, and the rally could have plenty of fuel left in the tank. While the sector still faces its challenges, sometimes, when expectations are low, stocks only need to exceed these low expectations to generate some decent returns, which is what seems to be happening now.
The XLF ETF offers a strong, cost-effective way to invest in all of these leading banks and financial companies and gain exposure to this potential turnaround.
