Banks Ace Fed Stress Test; These ETFs Benefit

June 30, 2017

Todd Rosenbluth is director of ETF and mutual fund research at CFRA.

After another successful year passing the Federal Reserve’s stress tests, many large-cap financial institutions received the green light yesterday to return capital to shareholders through dividends and buybacks.

Shareholders of Bank of America, Citigroup, JPMorgan Chase, Morgan Stanley and Wells Fargo—both direct and through funds—should expect to see such cash deployment in the second half of 2017.

Following the recent financial crisis, many banks and brokerage firms cut their dividends to preserve capital, ending a string of providing consistently high income streams to their investors.

Growing Income Generation

Whereas insurance companies—such as Cincinnati Financial and Old Republic International—are constituents in ETFs that focus on companies with 20-plus years of dividend hikes, including the ProShares S&P Dividend Aristocrats ETF (NOBL) and the SPDR S&P Dividend ETF (SDY), large banks and brokers are not well-represented in these diversified ETFs.

However, with the latest hikes, CFRA thinks they have begun to rebuild their reputation of growing income generation.

For example, some of the biggest changes occurred at Citi and Bank of America, which doubled and boosted their dividend 60%, respectively. J.P. Morgan and Morgan Stanley also had double-digit percentage increases in their dividends, while Wells Fargo raised its cash payout only modestly.


Capital Return Plans of Select Large-Cap Financials

  Citigroup Bank of America J.P. Morgan Morgan Stanley
Dividend Increase 100% 60% 12% 25%
Buyback Plan $15.6 Billion $12 Billion $19.4 Billion $5 Billion

Source: Company press releases


CFRA has a positive fundamental outlook on the diversified bank and the investment banking and brokerage subindustries. Ken Leon, an equity analyst for CFRA, believes many of the large-caps in these industries will benefit from recent and future increases in the fed funds rate.

The dividend moves should help improve the recently below-average 1.7% dividend yield for the S&P 500 financial sector. Not surprisingly, ETFs that focus on companies with higher yields, such as the iShares Core High Dividend ETF (HDV), have limited exposure to financials. Indeed, HDV had a recent 1% stake in the sector.


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