Financial ETFs Face Earnings & The Virus
Many of the U.S.' biggest banks report earnings this week. Which financials ETFs will see the biggest impact?
Welcome to what's likely to be the most bizarre earnings season any of us have ever seen.
While it's unclear just how much economic impact from COVID-19 we'll see reflected in this quarter's numbers, overall, analysts agree that most segments of the American economy will likely see a substantial hit.
Naturally, that's going to play out in sector-based ETFs.
Big Banks Reporting This Week
First on the docket: financials. Many of the U.S.' biggest banks report their earnings this week, including J.P. Morgan (JPM), Wells Fargo (WFC), Bank of America (BAC), U.S. Bancorp (USB) and Citigroup (C).
Other financial institutions reporting this week include regional banks like PNC Financial Services (PNC), investment banks like Goldman Sachs (GS), and even ETF issuers like BlackRock (BLK) and State Street (STT).
Earnings reports from the biggest banks should give us our first look at how the economic shutdown has impacted the infrastructure of American business, including lending, banking services, and merger and IPO activity.
But it's an inherently limited picture. It wasn't until mid-March that many businesses began to shutter operations, and state and local governments began to issue shelter-in-place orders. In addition, the Paycheck Protection Program, a $349 billion small business loan program that has led to increased loan revenue for banks in recent weeks, wasn't signed into law until March 25.
So while some analysts are predicting this quarter's earnings for financials will be down 13.7% year over year, really, it's anybody's guess.
Financial ETF Heavyweights
As banks report their earnings, all eyes will turn toward the 51 financials ETFs, which together total roughly $31 billion in assets under management.
The largest among these is the $15.9 billion Financial Select Sector SPDR ETF (XLF), which tracks the financials slice of the S&P 500 Index. It's an extremely liquid fund, with a spread of just 0.04%, making it a favorite for sector rotation and other tactically minded investors.
Other heavyweights in the space include the $5.4 billion Vanguard Financials ETF (VFH) and the $1.2 billion iShares U.S. Financials ETF (IYF).
Of these three, XLF has the highest concentration in the five big banks reporting earnings this week, with 30% of its portfolio in J.P. Morgan, Bank of America, Citigroup, Wells Fargo and U.S. Bancorp.
VFH has 27% of its portfolio in these companies, while IYF allocates 17%.
| Weighting Of Reporting Banks In Biggest Financials ETFs | ||||||
| J.P. Morgan | Bank of America | Wells Fargo | Citigroup | U.S. Bancorp | Total | |
| XLF | 11.88% | 7.49% | 4.63% | 3.76% | 2.05% | 29.81% |
| VFH | 9.97% | 6.67% | 4.49% | 3.79% | 1.89% | 26.81% |
| IYF | 6.66% | 4.32% | 2.66% | 2.20% | 1.16% | 17.00%
|
Source: ETF.com; data as of April 13, 2020
Opportunities In Smaller Financials ETFs
However, three smaller financials ETFs actually have higher allocations to these five stocks, including the $830 million iShares U.S. Financial Services ETF (IYG), the $331 million Invesco KBW Bank ETF (KBWB) and the $63 million First Trust Nasdaq Bank ETF (FTXO).
KBWB allocates 40% of its portfolio to the big U.S. banks reporting this week, while FTXO allocates 37% and IYG allocates 31%.
Each of these financials ETFs brings something unique to the table. KBWB offers probably the closest match to the broader U.S. banking sector, with the best-in-class match to our segment benchmark, the Thomson Reuters U.S. Banks Index.
IYG, on the other hand, offers a more diversified take, including exposure to internet financial firms, insurance companies and more.
Meanwhile, FTXO takes a multifactor smart beta take on financials, selecting 30 names based on their liquidity, then weighting them based on volatility, value and growth.
Contact Lara Crigger at [email protected]
