Bank ETFs rebounded lately after a prolonged period of volatility. A flattening yield curve was a major concern in mid-2019. However, the latest improvement in the space lifted bank ETFs like Nasdaq Bank ETF FT (FTXO - Free Report) , US Regional Banks iShares ETF (IAT - Free Report) , S&P Bank ETF SPDR (KBE - Free Report) and KBW Bank Invesco ETF (KBWB - Free Report) to a 52-week high on Nov 5 (see all financial ETFs here).
Let’s find out what’s working in favor of bank ETFs now.
Gradually Steepening Yield Curve
Since banks borrow money at short-term rates and lend capital at long-term rates, steepening of the yield curve is always a plus for bank ETFs. On Nov 5, the spread between the 10-year and two-year treasury yield stood at 23 percentage points versus 16 percentage points recorded at the start of the year, benefitting bank stocks and ETFs.
Actually, the movement of short-term bonds is more dependent on Fed behavior than long-term bonds. The Fed has enacted three rate cuts this year since July owing to rising global economic slowdown fears.
Meanwhile, reports of a phase-one trade deal between the United States and China in October boosted risk-on sentiments, which in turn provided a boost to the broader market. Meanwhile, Wall Street is hovering around a record high. These favorable developments contributed to the rise in long-term bond yields in recent weeks (read: S&P 500 at Record High: 6 ETF Winners of Last Week).
Favorable Earnings Picture
Per the Earnings Trends issued on Oct 31, 2019, about 89.7% of the S&P 500 financial companies reported earnings results, recording 1.3% earnings growth on 12.1% higher revenues. About 72.4% of the companies beat on the bottom line while 70.1% surpassed the top-line estimate. Overall, banks came out of third-quarter “earnings season with less bad earnings revisions,” per Bernstein’s Inigo Fraser-Jenkins, as quoted on barrons.com (read: Financial ETFs Gain Despite Mixed Earnings).
Focus on Value
Financial stocks are undervalued at the current level. The financial sector currently has a P/E of 12.48x versus 18.92x boasted by the S&P 500 ETF iShares Core S&P 500 ETF (IVV - Free Report) . Beta of the sector is 0.71x versus 1.05x beta of IVV. Price-to-Book ratio is 1.24x versus 5.00x of IVV. The sector also has less debt burden with a Debt-to-Equity ratio of 0.43x. This is down from the 0.72x debt-to-equity ratio boasted by the S&P 500.
The financial sector (up 17.2%) has lagged the broader market this year (up 24.6%). However, the sector added 5.4% in the past month (as of Nov 5, 2019) versus 4.4% gains seen in IVV. This shows that the sector has picked up momentum and should stay strong in the near term.
Against this backdrop, we highlight a few bank ETFs that have a Zacks Rank #2 (Buy).
Financial Select Sector SPDR Fund (XLF - Free Report)
Vanguard Financials Index Fund ETF Shares (VFH - Free Report)
First Trust Financials AlphaDEX Fund (FXO - Free Report)
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