Banking ETFs Weather Taper Talk Well

December 16, 2013

Bank-related ETFs are taking all the fines and new rules in stride.

Bank stocks have been among the top performers in this year’s market rally despite legal and regulatory issues surrounding the financial services space. And even with rising interest rates and the possibility of tapering by the Federal Reserve, the best days appear to still be ahead for bank stocks and related ETFs, analysts say.

J.P. Morgan Chase & Co. has seen its shares rise 28.1 percent so far in 2013. The bank has been hit with legal issues from all sides this year, including a possible $2 billion settlement with U.S. federal authorities to avoid prosecution for its failure to properly alert regulators of its suspicions about the record Ponzi scheme masterminded by Bernard Madoff.

That fine came on top of the landmark $13 billion fine that the bank shelled out in late November involving bad mortgage investments sold by J.P. Morgan, Bear Stearns and Washington Mutual in 2008, according to the Department of Justice.

Citigroup and Wells Fargo are up 28.7 percent and 27.3 percent, respectively, so far in 2013.

As if these regulatory head winds weren’t enough, banking stocks have also weathered the rise in benchmark Treasury yields that came in 2013, with the talk that the Federal Reserve would begin to unwind its purchases of long-term bonds to help keep borrowing rates lower.

Benchmark yields were around 1.6 percent in early May before the Fed started talking about the possibility of “tapering.” They’re now just shy of 2.9 percent as the market gets ready for the central bank to announce some change in policy, perhaps as early as this week at the end of its next policy meeting.

“We saw financial stocks perform very well as rates started to move higher in the second half of the year, and the Financial Select SPDR (XLF | A-87)  is a great way to get exposure to them,” said Todd Rosenbluth, director of ETF & Mutual Fund Research at S&P Capital IQ.

“We’re positive on U.S. diversified financial services companies, especially J.P. Morgan and Citigroup, so XLF is among our top financial services ETFs,” he added.

XLF is up 32.1 percent year-to-date. Its competitors, including the iShares U.S. Financials ETF (IYF | A-95), the Vanguard Financials ETF (VFH | A-94) and the Guggenheim S&P Equal Weight Financials ETF (RYF | B-83), are all also up—30.1 percent, 29.9 percent and 34.2 percent, respectively, year-to-date.

xlf_vs._iyf_vs._ryf_vs._vfh_ytd_performance

Chart courtesy of StockCharts.com

Rosenbluth also viewed the finalization of the Volcker Rule, which essentially prohibits proprietary trading among big banks, as a positive development for larger banks like J.P. Morgan and Citigroup that have been saddled with uncertainties surrounding aspects of the 2010 Dodd-Frank overhaul.

Also, Rosenbluth noted that his firm thinks the underlying holdings in XLF are still undervalued and have more room to go in terms of performance.

“Eight of the 10 largest stocks are either S&P Capital IQ Strong Buys or S&P Capital IQ Buy recommendations based on a 12-month time horizon, including Wells Fargo, J.P. Morgan and AIG,” he said.

 

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