3 Top-Ranked Financial ETFs Surging To 52-Week Highs

After a period of rough trading in the early part of the year, the financial sector is turning around on improving fundamentals and positive sentiment across banks. In fact, a strong momentum has built up for the space in recent months, propelling the stocks to new yearly highs. This suggests that finance is clearly emerging out of the worst recession seen in 2008.

This is especially true as the sector's earnings growth has been on an upward trajectory since the start of this year, as per the

. Earnings rose 3.8% annually in the third quarter from 0.9% in the second and a dilution of 7.1% in the first. This trend of sustained earnings growth will likely continue as we move into the next year. Earnings are expected to increase 6.9% in the ongoing fourth quarter and 11.5% in the first quarter of 2015.

Notably, the banking industry has seen another robust quarter. American banks and other financial institutions insured by the FDIC recorded their largest quarterly revenue growth in the third quarter in almost five years. Revenues rose 4.8% from the year-ago quarter, making this a $171.3 billion industry. On the other hand, profits climbed 7.3% year over year to $38.7 billion following the second-highest profit of $40.24 billion recorded in the second quarter in at least 23 years (read:

).

Further, the number of banks at risk of failure continued to decline and only two banks failed in the last quarter, down from six a year ago. Strong performances were mainly driven by solid loan growth, higher trading income, improving credit quality and litigation settlements. In addition, the quality of earnings is improving with growing economic conditions. And, as the health of banks' loan portfolio continues to improve, they will need less loan loss reserves in the future.

In fact, the four big banks – JPMorgan

, Citigroup

, Bank of America

and Wells Fargo

– released $1.57 billion in reserves in the third quarter, representing the lowest level since the bank started releasing the loan loss reserve in early 2010. This is down from $2.25 billion in the second quarter and $4.88 billion in the year-ago quarter.

Moreover, as the yield curve steepens, expanding net interest margins will bolster banks' profits. Meanwhile, a healthy job market, growing manufacturing and service sectors, renewed housing recovery and rising consumer confidence would lead to higher demand for all types of financial services. All these factors are spreading optimism into the whole sector.

While most of the financial products have seen smooth trading, we have highlighted three ETFs that surged to the new 52-week high to end November and could rise further in the days ahead given bullish fundamentals. Any of these funds could make for a compelling choice for investors seeking to tap the surge given that these have a solid Zacks ETF Rank of 1 or ‘Strong Buy' rating, suggesting continued outperformance in the coming months (read:

).   

This is by far the most popular financial ETF in the space with AUM of $19 billion and an average daily volume of over 32.5 million shares. The fund follows the S&P Financial Select Sector Index, holding 87 stocks in its basket. It is heavily concentrated on the top three firms – Berkshire Hathaway (BRK.B), Wells Fargo and JPMorgan – which make up for one-fourth of the portfolio while other firms hold less than 6% share.

In terms of industrial exposure, banks dominate the fund's return at 36%, followed by insurance (16.9%), REITs (14.5%) and capital markets (13.7%). The product charges 16 bps in fees per year from investors and has gained 13.2% in the year-to-date time frame. Though XLF touched its fresh 52-week high of $24.51, it is still trading 36% below the all-time high reached in 2007, suggesting enough room for upside.

This product follows the Dow Jones U.S. Financial Services Index and holds 112 stocks in its basket. Here again, WFC and JPM make up for the top two holdings with double-digit allocation while other firms hold less than 8% share. Banks take the top spot at 54% from the sector look while financial services make up for the remainder (read:

).

IYG has amassed $617.1 million in its asset base and trades in a lower average daily volume of about 45,000 shares. It charges an annual fee of 43 bps from investors. The product attained its new yearly high of $90.63 having gained 9% so far this year. The upward trend is likely to continue given that the ETF is trading at a discount of 34.2% to the all-time high reached in 2007.

This fund manages nearly $2.4 billion in asset base and provides exposure to a basket of 542 financial stocks by tracking the MSCI US Investable Market Financials 25/50 Index. The product sees a solid volume of around 246,000 shares and charges 19 bps in annual fees. Unlike the other two counterparts, it is pretty well spread across each component as none of these holds more than 6.9% of assets (see:

).  

Again, the product is skewed toward banks with one-third share, while REITs and insurance round off the next two spots with double-digit exposure. The fund has returned over 12% in the year-to-date time frame and is currently trading 27% below its 2007 all-time high of $67.68. The solid performance is expected to continue given the existing bullish fundamentals remain in the coming months.

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