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The banks are back.
In the last month, three financial exchange-traded funds — the Financial Select Sector SPDR Fund, or XLF; the SPDR S&P Bank ETF, or KBE; and the SPDR S&P Regional Banking ETF, or KRE — have all rallied over 9%. That makes the financials the best-performing sector in April.
And market watchers still see ways for investors to play the space, which had been slightly underperforming the broader market until the last few weeks.
“There are several ways ETF investors can look at this differently than just buying XLF,” Christian Magoon, CEO of Amplify ETFs, said Monday on CNBC’s “ETF Edge.” “One of them is to change the capitalization weighting of their ETF, so instead of doing market-cap weighting, they could do equal weighting. Equal weighting emphasizes small- and mid-cap companies more. They have more volatility on the downside, but also, they have more volatility on the upside.”
To that end, Magoon recommended buying into the Invesco S&P 500 Equal Weight Financials ETF, ticker RYF, which counts the stocks of MSCI and Discover Financial Services among its top holdings.
“It’s equal weighted, and that’s a way to maybe amp up the risk profile here if we’re in a positive-moving financial sector,” the CEO said.
Tim Seymour, founder and chief investment officer at Seymour Asset Management, stuck to the basics.
“I would go back to XLF, and here’s why,” Seymour, also a trader on CNBC’s “Fast Money,” said in the same interview. “You have the money-center banks, which make up 35% of this ETF, and then you have Berkshire Hathaway, which, frankly, I think you could strip out of there. Unfortunately, it’s 12% of the index. But bottom line here is, since earnings, we’ve seen that year over year banks are actually still near record profitability, but the decline in rates has largely been priced in. “
He pointed out that since rates bottomed in late March, the XLF has outperformed the S&P 500 by more than 5%, a sign that “easing credit conditions ” were outweighing any lingering pressures brought about by rate-related headwinds.
“I think the money-center banks, relative to everything else we’re talking about in the sector you can get in an ETF, look the cheapest relative to their long-term average [of] 9.5 times [price to earnings],” Seymour said. “That’s cheap to [their] history.”
The XLF, KBE and KRE all climbed more than 1% on Monday. They are all up at least 17% for the year.
