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Opening the Book on the SPDR Financial Select Sector ETF (XLF)

By  +Follow December 9, 2013 1:47PM
Tickers Mentioned:

Generally speaking, when the stock market is doing well, the big banks are among the winners. Strong financial times tend to mean there’s more money around to fund all that growth, and that tends to benefit those actors profiting from moving that money around. What’s more, a growing stock market means more money in the hands of the sorts of people interesting in putting that money to work. Also good for investments banks.

So it should come as no shock that the primary ETF tracking the financial sector, the SPDR Financial Select Sector ETF ($XLF), is among the ETFs that are most actively traded and beating the S&P 500 in 2013, up 30.96 percent to the S&P’s 26.81 percent. In fact, it’s not out of the question to consider the XLF as a slightly leveraged version of the SPDR S&P 500 ETF ($SPY) given that the financial sector’s fortunes tend to be so closely tied to the market as a whole (though, it’s not designed that way and one could certainly get into trouble treating it as such).

So what’s in the XLF, then? Given that traders and investors are moving it around with an average daily volume that exceed 35 million shares, it’s worth taking a closer look at this ETF, what’s in it, and what major factors are most likely to make it move.

Times are Good for XLF, Financial Stocks

It’s been a solid year for financial stocks. The financial sector derives the majority of its revenues from lending money, trading financial instruments, and acting as a broker to others looking to trade financial instruments. And two factors have been working in confluence to facilitate all of these activities: a growing economy and low interest rates.

Low interest rates help people borrow and lend more money, increasing the sort of activity that the financial sector banks on (pun intended) for its regular cash flow. A growing economy also means an environment where people are more comfortable borrowing.

And the two factors together is a situation that’s not entirely a common one. Typically speaking, the Fed will raise interest rates in a growing economy/bull market to control inflation. At the moment, though, interests rates are at zero, the Fed continues to effectively print money through its stimulus programs, and inflation continues to appear to remain in check. It’s a situation that clearly can’t last forever, but one that’s made for a particularly positive environment for the financial sector over the last year.

XLF Holdings

Like most SPDR ETFs, XLF is connected to an S&P index, in this case the S&P Financial Select Sector Index ($IXM). The index has 82 components, all members of the S&P 500 operating in the financial sector. Quickly parsing over the numbers, XLF has actually missed its target index by a half percent in 2013, a big enough difference to make note of (IXM is up 30.43 percent in 2013 to XLF’s 30.96 percent). Not that most investors will be griping much given that A) they’re both up over over 30 percent and B) XLF was on the right side of that difference.

XLF’s holdings are cap-weighted and generally reflect the same ownership ratios of IXM, making them largely academic. However, for those interested, the breakdown is pretty much what you would expect, with the big four banks making up four of the top five holdings, each with more than 6 percent of the portfolio: Wells Fargo (WFC) at 8.18 percent of holdings, JP Morgan & Chase (JPM) at 8.1 percent, Bank of America (BAC) with 6.41 percent, and Citigroup (C) with 6.01 percent. Rounding out the top five is Berkshire Hathaway ($BRK.A) with 8.06 percent of the portfolio.

There’s a big drop off after those top five holdings, which generally reflects the nature of the sector’s major players. American Express ($AXP) is the fund’s sixth largest holding with just 3.06 percent of the holdings. The biggest investment-only banks have smaller holdings, with Goldman Sachs (GS) at 2.68 percent of holdings and Morgan Stanley (MS) at 1.63 percent.

XLF’s Prospects in 2014?

No one can tell the future, obviously, but it seems a fairly safe bet that XLF will at least fail to have the sort of banner year in 2014 that it has in 2013. For starters, the strong run for equities as a whole would seem to be an unsustainable rate of growth, let alone the financial sector. It also seems a pretty safe bet that the Fed will decide to start tapering QE III and raising interest rates in the next few months (though, getting a precise answer to the question of when will probably remain a focus of everyone’s interest until it happens).

With these downward pressures potentially coming in the approaching months, it seems difficult to believe that XLF will be able to match the massive 30 percent return its managed in 2013. What’s more, some technical patterns could also indicate a sell-off is coming. A look at the stock chart would seem to show a rising wedge developing over the summer and steepening sharply in early October. This pattern would seem to also point towards a potential downward breakout coming early next year.

Of course, if the equities market defies its bears and continues with another year of rapid growth, it’s not hard to imagine that any downturn based on the taper would be temporary and XLF would continue growing. As always, there’s no real way of knowing for sure until it happens.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.

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Results for xlf
2 Sep 14 16:57:28
Going into the Sept. 3/4 turn date, $XLF somewhat outperforming $BKX - will watch if relative performance changes. http://t.co/MeF2LmT6XX
Business News Watch
2 Sep 14 16:56:01
$XLF: [video] http://t.co/xNVp1c88kq hot list: Bove warns of mortgage crisis http://t.co/vRg3Cs9wbQ http://t.co/LXrbkP7Xlc
Marshall Moore
2 Sep 14 16:20:14
RT @MarketCurrents: FBI finds no evidence J.P. Morgan breach hit other big U.S. banks http://t.co/hImIMhAiON $JPM $XLF $FAS $FAZ
Bidness Etc
2 Sep 14 16:19:00
Arthur Andersen: Back From The Dead? http://t.co/Ecky7HMPTv $XLF
2 Sep 14 16:15:50
FBI finds no evidence J.P. Morgan breach hit other big U.S. banks http://t.co/hImIMhAiON $JPM $XLF $FAS $FAZ
Top ETF Funds
2 Sep 14 15:57:33
[video] Expect housing sales surge this fall?.. http://t.co/JSfiJ5kXax $XLF #ETF #ETFs #Stocks
Top ETF Funds
2 Sep 14 15:57:17
[video] http://t.co/7rjFivmpQz hot list: Bove warns of mortgage crisis.. http://t.co/eq1KZOvpXe $XLF #ETF #ETFs #Stocks
Top ETF Funds
2 Sep 14 15:57:00
Cramer: Twitter and other 'irresistible' stocks.. http://t.co/kBGBLDjJoT $XLF #ETF #ETFs #Stocks
Biz Headlines
2 Sep 14 15:56:00
$XLF: [video] JPMorgan probes cyberattack http://t.co/5DLr7Y6vRm http://t.co/L5I60M95vx
Business News Watch
2 Sep 14 14:55:54
$XLF: Must-know: Putting the price–to-book value ratio in perspective http://t.co/74m0npsyeI http://t.co/CZkWf7Yp41
PennyStock Zone
2 Sep 14 14:49:16
Best day trading DVD by Fous Alerts check it out! http://t.co/AeQ95GG2rM #stocks #trading #nasdaq #nyse $XLF $HPQ $INTU $INTC $PCLN $QUNR
Declan Fallon
2 Sep 14 14:34:02
#sectorbreadth [sell] $XLU > [80] $XLF > $XLI > [70] $XLP > $XLY > $XLV > $XLB > [60] $XLK > $XLE. $SPX bullishness slips one to 78%
2 Sep 14 14:31:58
Top Shorted Stocks 09/02/14... 14. $CHK 77.98% 15. $IWM 77.63% 16. $XOP 76.96% 17. $XLF 76.19% 18. $GGB 74.84% 19. $NU 74.57%...
2 Sep 14 14:31:56
Top Shorted Stocks 09/02/14... 16. $XOP 76.96% 17. $XLF 76.19% 18. $GGB 74.84%... http://t.co/Su88dUouaw
361 Capital
2 Sep 14 14:19:19
XL sectors mixed: $XLF $XLI +0.3%, $XLE -1.3%, $XLU -0.9%. ↑ETFs: Japan, Transp, Internet, India, Swiss. ↓ETFs: Miners, Oil, Bonds, Gold.
Bidness Etc
2 Sep 14 14:12:22
How The New Funding Rules Will Hurt Banks http://t.co/UM1Vczp9dr $BAC $WFC $JPM $C $XLF
2 Sep 14 14:05:50
$XLF bullish http://t.co/NwpIMFPamm
Jeff Quiggle
2 Sep 14 14:00:13
Business News Watch
2 Sep 14 13:56:00
$XLF: Sell in May and go away? http://t.co/ua5H611DAg http://t.co/0pK6gjuz7z
Top ETF Funds
2 Sep 14 13:21:41
[video] 'Mortgage crisis' coming this winter: Bove.. http://t.co/RKvjLe2qBG $XLF #ETF #ETFs #Stocks
Stock Rocket
2 Sep 14 13:21:27
$DGLY is up 940.2% in 3 weeks! Our new penny stock alerts are coming soon: http://t.co/G4xan5kQD5 $XLF $F $FN $MSFT
Top ETF Funds
2 Sep 14 13:21:24
[video] Pzena's big bank picks.. http://t.co/SbrG4SlI7o $XLF #ETF #ETFs #Stocks
Top ETF Funds
2 Sep 14 13:21:08
Must-know: The 8 types of bank risks.. http://t.co/Atks56mhOV $XLF #ETF #ETFs #Stocks
Top ETF Funds
2 Sep 14 13:20:52
[video] Eric Cantor's new job.. http://t.co/vyXXiOsdnt $XLF #ETF #ETFs #Stocks
Financial Headlines
2 Sep 14 12:55:58
$XLF: Sell in May and go away? http://t.co/CVLrlGDq0Y http://t.co/8ii3Q3ZyNQ
2 Sep 14 12:39:44
http://t.co/hjgLwIcNgz Jake13: $XLF Buy or Sell Opinion Click here to find out: Jake13 http://t.co/zUu2pcx51Y http://t.co/hjgLwIcNgz
2 Sep 14 12:39:43
http://t.co/QkCFZ8H3V8 Jake13: $XLF Buy or Sell Opinion Click here to find out: Jake13 http://t.co/Esl1SmGsPV http://t.co/QkCFZ8H3V8
Mah Bizzle
2 Sep 14 12:34:34
These banks doe $XLF
Jesse Felder
2 Sep 14 12:19:30
Dick Bove: "Winter is coming" for mortgage and real estate markets http://t.co/GA36uobxwC $XHB $TLT $XLF
2 Sep 14 12:17:43
Kevin D. Williamson
2 Sep 14 12:16:08
RT @macroQmicro: The Corrupt Bargain: Detroit’s bankruptcy, a rogues’ gallery. http://t.co/X7ml5gqlna #politicians #lawyers #WallStreet $MU…
Jeff Quiggle
2 Sep 14 12:04:11
The Corrupt Bargain: Detroit’s bankruptcy, a rogues’ gallery. http://t.co/X7ml5gqlna #politicians #lawyers #WallStreet $MUB $XLF
Briefing Trader
2 Sep 14 12:00:52
$SPY sector out-performance into the final hour of #trading in $XLI & $XLF #ETFs
Investors Hangout
2 Sep 14 10:57:31
Jake13: $XLF Buy or Sell Opinion Click here to find out http://t.co/HcaeA1tAwe
Investors Hangout
2 Sep 14 10:57:31
Jake13: $XLF Buy or Sell Opinion Click here to find out http://t.co/7NUZadlTn1
Market News
2 Sep 14 10:55:51
$XLF: Must-know: Understanding credit risk in the banking business http://t.co/W0BQ1xwzDf http://t.co/wvRQO8he9E
Extreme Stocks
2 Sep 14 10:54:17
Jake13: $XLF Buy or Sell Opinion Click here to find out http://t.co/11GiadFZC5
2 Sep 14 10:44:14
$XLF Buy or Sell Opinion Click here to find out if $XLF is a buy hold or sell. Watching these stocks. $IYR $RE http://t.co/RMOhQOmxoV
2 Sep 14 10:15:51
RT @muathe: [VIDEO REPOST] Weekend Market Analysis 08/31/2014 [PUBLIC] $DJIA $IWM $GDX $XLF $EEM $EWJ $VXX $FXI $TZA $GDXJ $VWO http://t.co…
Financial Iceberg
2 Sep 14 10:10:08
SP500 Financials ( XLF ): Break Out ? $SPY, $SPX, $ES_F, $XLF http://t.co/CgZPa3CwKS
PennyStock Zone
2 Sep 14 10:01:41
Best day trading DVD by Fous Alerts check it out! http://t.co/HJ6WDp65fM #stocks #trading #nasdaq #nyse $XLF $HPQ $INTU $INTC $PCLN $QUNR
Dana Lyons
2 Sep 14 09:41:32
Especially poor reversal lower in financials from new highs. $XLF
Market Int Center
2 Sep 14 09:05:29
Potential Financial Select Sector SPDR $XLF Trade Has 5.74% Downside Protection ( http://t.co/X8o5lfF4RD )
Market News
2 Sep 14 08:55:55
$XLF: Must-know: Putting the price–to-book value ratio in perspective http://t.co/UdIVECJty3 http://t.co/IxnxXyAVcV
2 Sep 14 08:37:06
We have added $XLF to the list of available symbols for the market behavior reports. http://t.co/dyTXgz6Rh2
Interactive Brokers
2 Sep 14 08:29:47
#IBTI Technical Analysis - Waverly Advisors Summary Stats http://t.co/w7ILF1ofAi $SPY $IWM $QQQ $FXE $USO $GLD $FXY $XLF
2 Sep 14 08:27:01
Time to "Get out the way" @federalreserve #CorrectionTime $SPY $SPX $XLF $QQQ $VIX
2 Sep 14 08:02:04
$XLF hey, good looking.
Top ETF Funds
2 Sep 14 07:58:13
Must-know: The consequences of imprudent risk-taking by banks.. http://t.co/JDt8rGKpYr $XLF #ETF #ETFs #Stocks
Market Updates
2 Sep 14 07:56:03
$XLF: [video] US bank hack mystery http://t.co/WCtuMoxJsf http://t.co/aW1qo24hYG
By  +Follow December 9, 2013 1:47PM



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