ETFs

Financials Could Pose Opportunity

By Kevin Grewal

The global financial sector was at the epicenter of the worldwide economic meltdown, but as economies start to recover and show signs of economic expansion, the financial sector is likely to reap the benefits.

Some positive forces that are likely to bolster the financials include an improved housing market, a boost in consumer confidence, an increase in consumer spending, fiscal stimulus initiatives funded by the federal government, an increase in business investment and healthier credit markets.

Additionally, most big banks have increased their capital reserves and have implemented stricter capital rules to prevent a relapse of what happened in 2008 and 2009. As a result, many analysts suggest that significant risk factors have been priced into most big bank stocks as they continue to regain strength.

Lastly, the financials appear to be attractive because technical indicators suggest that overall market risk tolerance is improving. This is evident in the decline in junk bond spreads, which are at their lowest levels in two years, and a decline in speculative-grade default rates. According to Standard & Poor’s, the month of December recorded four such defaults and all were from the nonfinancial industry. In fact, December witnessed the first monthly decline in such defaults in over two years and has started a trend that is expected to continue.

The financial sector remains a crucial factor in the overall sustainability of a global economic recovery and there are numerous forces that suggest the sector will continue to build strength. With this in mind, the following ETFs could pose an opportunity:

  •  The Financial Select Sector SPDR (XLF), which is the most commonly traded financial ETF and holds stocks like Bank of America (BAC) and Wells Fargo (WFC). XLF has rallied above 21% over the past year and closed at $15.31 on Thursday.
  • The iShares S&P Global Financials (IXG), which gives exposure to global banks and includes HSBC (HBC) and JP Morgan Chase (JPM) in its top holdings. IXG is up by about 34% over the past year and closed at $47.38 on Thursday.
  •  The iShares Dow Jones US Financial Sector (IYF), which holds Goldman Sachs (GS) and American Express (AXP) in its top holdings. IYF is up nearly 20% over the past year and closed at $54.33 on Thursday.

Of course, there is always the possibility that macroeconomic factors like high unemployment can result in a false breakout and an economic recovery can come to a halt. For this reason, it is important to implement an exit strategy which identifies price points at which an upward trend could potentially come to an end.

According to the latest data at http://www.SmartStops.net, an upward trend in the previously mentioned ETFs could come to an end at the following price points: XLF at $14.67; IXG at $46.44; IYF at $52.40. These price triggers change with volatility and market conditions and updated data can be found at http://www.SmartStops.net.

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