ETF Of The Week: Financial Select Sector (XLF)

June 29, 2018

Welcome to ETF of the Week, a designation given to the most newsworthy or notable fund of the past seven days.

Thirteen days. That's how long the $29.7 billion Financial Select Sector SPDR Fund (XLF) spent in the red over the past few weeks. In fact, XLF's losing streak only broke Thursday, with the barest bounce: 0.9%.

XLF's extended free fall, the longest the fund has ever had, underscores just how nervous investors are feeling about the financials sector right now, and about XLF in particular. Since June 11, investors have pulled more than $1.5 billion from the fund.

As of June 28, XLF was down 3.61% year-to-date. Compare that to the tech-dominated SPDR S&P 500 ETF Trust (SPY), which was up 2.6% over the same period:

 

Source: StockCharts.com; data as of June 28, 2018

 

Trade Tensions & Recession Fears

You might think financials would be crushing it right now, given the Fed's push to raise rates and tighten monetary policy and Congress' push to roll back provisions of the Dodd-Frank Law. I thought so, when I made the SPDR S&P Regional Banking ETF (KRE) my ETF Of The Week around this time last month (read: "ETF Of The Week: Regional Banking ETF 'KRE'").

However, trade tensions—namely, the Trump tariffs and the threat of an all-encompassing trade war between the U.S. and China, Canada and whoever else the president might blame this week—have begun to take their toll on the financial sector. Most experts agree that a trade war would be bad for both the U.S. economy and the global economy; it would therefore also be bad for banks, which typically finance said economy.

It hasn't helped that the yield curve has flattened considerably—almost to the point of inverting—which depresses banks' net interest margins and crimps their profitability. What's more, an inverted yield curve is a flashing warning sign: One has preceded every recession of the past 60 years. If and when it flips, it would be a clear signal that today's barn-buster economy could come to a screeching halt.

Go-To Financials Fund

As the oldest and largest financials ETF on the market, XLF remains the go-to proxy for the sector. It takes a broad approach, with a portfolio that spans all types of financial firms. Just under half (49.5%) of the fund is in large U.S. banks, with another hefty chunk (28%) in insurance companies. Investment banks only make up 19% of the fund, though Berkshire Hathaway is XLF's largest holding, at 11%. The fund's top three is rounded out by J.P. Morgan Chase (11%) and Bank of America (8%).

Notably, XLF is one of the most actively traded ETFs on the market today, routinely trading more than $1.4 billion worth of volume daily. Its options market is both liquid and massive (read: "15 Most Actively Traded ETFs").

With an expense ratio of 0.13% and an average spread of 0.04%, XLF has extremely low all-in costs. It's also available on many platforms for commission-free trades.

But cheap doesn't guarantee good returns. As always, trade with care.

Contact Lara Crigger at [email protected]

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