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Bullish On The 'New' Looking XLF

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One of the more interesting events, at least for indexing nerds, recently occurred when the separation of real estate stocks from the financial services sector sparked the creation of an eleventh S&P 500 sector.

So these days the Financial Select Sector SPDR Fund (NYSE: XLF), the largest financial services exchange-traded fund, looks a lot different after parting ways with real estate stocks, a group that once accounted for about 19 percent of XLF's weight.

A New Look For XLF

XLF was already attractively valued, but with pricey real estate stocks eliminated from the ETF, XLF as value play is a thesis with additional merit.

“More importantly, without REITs XLF sports cheaper valuation multiples. The price-to-book value multiple has fallen from 1.4x to 1.2x , while Return on Equity earnings by firms in the slimmed down XLF is actually a tad higher than previously,” said AltaVista Research in a recent note.

Related Link: The Ins And Outs Of Bank Bail-Ins And Bail-Outs

With real estate no longer a part of XLF's lineup, AltaVista upgraded the ETF to overweight from neutral. The new rating implies above average appreciation potential.

“A rating of Overweight [emphasis omitted] is assigned to funds with ALTAR Scores™ above 8.0 percent but less than 11 percent. Typically, funds in this category consist of stocks trading at attractive valuations and/or having above-average fundamental,” according to AltaVista.


XLF now allocates more than 42 percent of its weight to bank stocks and more than 20 percent to insurance companies. Capital markets and diversified financial services companies combine for over 31 percent of the ETF's weight. The ETF is dominated by three stocks: Berkshire Hathaway Inc. (NYSE: BRK-A) (NYSE: BRK-B), JPMorgan Chase & Co. (NYSE: JPM) and Wells Fargo & Co (NYSE: WFC), a trio that combine for nearly 30 percent of XLF.

“With Real Estate no longer part of the Financial sector, the focus is on Financial Services where the outlook remains clouded by the pace of interest rate hikes (if any) and the aging bull market. Post-Financial Crisis, return on equity for these firms has settled into a range around 8–10 percent, and the stocks are trading at quite reasonable valuation multiples. The sector enjoys Overweight [emphasis omitted] recommendation as a result,” added AltaVista.

Disclosure: Todd Shriber owns shares of XLF.

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