A New Sector ETF Defends Against Rising Rates On The Cheap

As investors have come to grips with the fact that it is highly likely that the Federal Reserve will finally raise interest rates next month, 10-year Treasury yields have begun pricing in that view by soaring nearly 8.5 percent over the past month.

 

Although financial services stocks, on a historical basis, have questionable reactions to increases in borrowing costs, conventional wisdom holds that the sector is positively correlated to higher interest rates. The corresponding exchange traded funds are reflecting that thesis as the Financial Select Sector SPDR XLF, the largest financial services ETF, is higher by 2.1 percent over the past month. 

 

With rising rates right around the corner (maybe), investors might want to have a look at a new financial services ETF, the Financial Services Select Sector SPDR XLFS. The Financial Services Select Sector SPDR, which debuted last month, was brought to market ahead of real estate becoming the eleventh Global Industry Classification Standard (GICS) sector. That change is scheduled to occur after markets close on August 31, 2016. In November 2014, S&P Dow Jones Indices and MSCI, two of the largest providers of indices for use with ETFs, announced real estate – previously included as part of the financial services group – would become its own sector. 

 

Another way of looking at XLFS is that the new ETF is XLF without real estate stocks, an important feature when considering real estate equities are vulnerable to rising interest rates and currently richly valued relative to the broader market.

 

According to AltaVista Research data, the Real Estate Select Sector SPDR Fund XLRE, which debuted with XLFS, has an estimated 2015 price-to-earnings ratio of 36.4 compared to 17.8 for the S&P 500. Underscoring how much of a difference real estate exposure makes in terms of valuation, the P/Es for XLFS and XLF are 12.9 and 14.4, respectively. Remember, XLFS does not hold real estate stocks, but XLF does.

 

Financial Services firms have made steady improvements in profitability (margins and ROE) since the Financial Crisis, and with lower leverage hopefully they will be more stable as well. Given the robust, double-digit long-term EPS growth projections and reasonable valuation multiples, the sector looks attractive at these levels,” said AltaVista.

 

The research firm rates XLFS neutral. Warren Buffett's Berkshire Hathaway Inc. (NYSE: BRK-B) and Wells Fargo & Co. WFC combine for over 20 percent of XLFS's weight. Other top 10 holdings include Bank of America Corp. BAC and Citigroup Inc. C.

 

Todd Shriber owns shares of XLF.

Posted In: Long IdeasNewsSector ETFsNew ETFsIntraday UpdateMarketsTrading IdeasETFs

Ad Disclosure: The rate information is obtained by Bankrate from the listed institutions. Bankrate cannot guaranty the accuracy or availability of any rates shown above. Institutions may have different rates on their own websites than those posted on Bankrate.com. The listings that appear on this page are from companies from which this website receives compensation, which may impact how, where, and in what order products appear. This table does not include all companies or all available products.

All rates are subject to change without notice and may vary depending on location. These quotes are from banks, thrifts, and credit unions, some of whom have paid for a link to their own Web site where you can find additional information. Those with a paid link are our Advertisers. Those without a paid link are listings we obtain to improve the consumer shopping experience and are not Advertisers. To receive the Bankrate.com rate from an Advertiser, please identify yourself as a Bankrate customer. Bank and thrift deposits are insured by the Federal Deposit Insurance Corp. Credit union deposits are insured by the National Credit Union Administration.

Consumer Satisfaction: Bankrate attempts to verify the accuracy and availability of its Advertisers' terms through its quality assurance process and requires Advertisers to agree to our Terms and Conditions and to adhere to our Quality Control Program. If you believe that you have received an inaccurate quote or are otherwise not satisfied with the services provided to you by the institution you choose, please click here.

Rate collection and criteria: Click here for more information on rate collection and criteria.