How The Biggest Bank ETF Is Shaping Up Ahead Of Earnings

Shares of the Financial Select Sector SPDR XLF, the largest financial services exchange traded fund, are trading lower by half a percent at this writing before this week's avalanche of major bank and brokerage earnings starts trickling with Dow component J.P. Morgan Chase & Co. JPM reporting after the close of U.S. markets today.

Predictably, XLF declined after the Federal Reserve passed on raising interest rates last month, but the ETF has steadied to post a modest gain of a third of a percent over the past month. As has been duly noted, this is a big week for XLF and rival financial services ETFs and that importance will be on display this afternoon because J.P. Morgan Chase is XLF's third-largest holding at a weight of almost eight percent. 

Heading into bank earnings season, some analysts are voicing lukewarm views on the sector and ETFs such as XLF. For example, AltaVista Research rates XLF neutral, implying average appreciation potential.

“A rating of NEUTRAL is assigned to funds with ALTAR Scores™ between 6.0% and 8.0%. This indicates that valuations adequately reflect the fundamentals of stocks in these funds. The majority of funds we cover fall into this category,” said the research firm in a recent note.

Even neutral views on XLF will be tested Wednesday when at least four of the ETF's holdings report third-quarter results. That group includes Wells Fargo & Co. WFC and Bank of America Corp. BAC, a combined 14 percent of XLF's weight. On Thursday, at least six XLF holdings step into the earnings confessional, including a trio of the ETF's top 10 holdings that combine for 11.2 percent of the ETF's weight.

Some investors remain leery of the potential of XLF holdings to deliver noteworthy earnings surprises as highlighted by the more than $243 million in assets shed by the ETF this month. That follows more than $491 million in third-quarter departures, the bulk of which were likely caused by the Federal Reserve not raising interest rates last month. 

“Profits and profitability look set to rise smartly for the year, but the outlook is clouded by the possibility of interest rates staying lower for longer, not to mention the volatile, aging bull market. Long term, Return on Equity has settled into a range around 8-10% in the wake of deleveraging and new regulations--about half of what it was prior to the financial crisis--but hopefully less volatile. At present Financials appear fairly valued versus the S&P500,” said AltaVista.

Todd Shriber owns shares of XLF.