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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
21 Aug 14 04:18:38
#LongPremium & Then manage the life out of your #Greeks !! $SPY $QQQ $XLK $XLF $VIX
Investors Hangout
21 Aug 14 03:58:42
$EA Company Info http://t.co/HctLQ2FUlh Also See: $XLF $LEI $ACT $CRM ~
Investors Hangout
21 Aug 14 03:57:57
Stock_Tracker: Financial Select Sector SPDR (XLF) 22.93 $XLF http://t.co/ljbSs22TRi
Investors Hangout
21 Aug 14 03:57:40
Stock_Tracker: Financial Select Sector SPDR (XLF) 22.93 $XLF http://t.co/PQZWNr75PZ
Stock Updates
21 Aug 14 03:55:49
$XLF: [video] Never short a dull market: Trader http://t.co/DcKLEQvDRf http://t.co/GcYNpttT6e
Stock Forums
21 Aug 14 03:32:41
$DRL 52Wk Low http://t.co/RjqjC8pCj1 Also See: $XLF $ACT $NUGT $PDN.TO ~
Chasing Stars
21 Aug 14 03:15:20
$DRL Ex-Div Date http://t.co/V3zWvB36EY Also See: $JCP $IBB $XLF $KMI ~
Rosner Stocks
21 Aug 14 03:09:45
Rosner: XLF Select Sector SPDR Trust (The) $XLF Company http://t.co/YIsQxQK1pT
21 Aug 14 02:44:03
$XLI $XLF $QQQ $NDX already forming Demark 9 and 13 sell signals past 1 day , the risk is clearly to downside short term.
Investors Hangout
21 Aug 14 02:01:36
$CMG % Change http://t.co/WR6bjkuLYg Also See: $HYG $SPWR $XLF $GDX ~
21 Aug 14 01:56:26
Mornin' form Dublin!! Still riding the upside #Delta (Oct Calls) & looking at starting to build Nov #Straddles $SPY $QQQ $XLK $XLF $VIX
Market Monitor
21 Aug 14 01:55:43
$XLF: [video] Home builder confidence surges http://t.co/guRZUgYmaK http://t.co/f8kgati7Ar
Investors Hangout
21 Aug 14 01:49:32
$CHL E.P.S. http://t.co/OCAH2T07kB Also See: $HKUP $XLF $AMGN $COP ~
Chasing Stars
20 Aug 14 23:42:01
$BIDU 52Wk High http://t.co/mm1tn4Z3AI Also See: $KMI $BAC $XLF $SLV ~
Hedge Accordingly
20 Aug 14 22:21:04
$XLF “@ReutersBiz: Exclusive: U.S. regulators step up warnings to banks for poor risk-spotting http://t.co/AJJ1JrT5x9”
20 Aug 14 21:12:24
Police Murder Today Caught on Tape https://t.co/rg6OBWHTT2 $SPY $DIA $QQQ $FB $TWTR $AAPL $MSFT $GOOG $INTC $BAC $C $JPM $WMT $KO $FOLD $XLF
20 Aug 14 20:52:13
$GLBH closed up 150% today! Major Update: http://t.co/WFeoEydWra $XLF $F $FN $MSFT
20 Aug 14 16:58:21
RT @toddstrade: $XLF Quarterly. Past two Quarters had gap up with increasingly narrower dojis http://t.co/um9y7YHmXG
Market News Desk
20 Aug 14 16:56:00
$XLF: Today's Market Thorns... http://t.co/O3sUwzItzw http://t.co/vuwhWGhLYn
ETF Trends
20 Aug 14 16:50:14
#ETF Investors Shrug Off #Volatility in Bullish Conditions http://t.co/YdpwH7LaQl #VIX #ETFs #stocks $VXX $VIXY $SPY $XLF $XLK
20 Aug 14 16:48:39
$XLF Quarterly. Past two Quarters had gap up with increasingly narrower dojis http://t.co/um9y7YHmXG
Tom Lydon
20 Aug 14 16:45:23
#ETF Investors Shrug Off #Volatility in Bullish Conditions http://t.co/awFymKBCNE #VIX #ETFs #stocks $VXX $VIXY $SPY $XLF $XLK
Rosner Stocks
20 Aug 14 16:05:54
$XLV Volume http://t.co/v0NDymCiUF Also See: $XLF $DGLY $KRE $DUST ~
Top ETF Funds
20 Aug 14 15:57:44
[video] Stock picks post-Fed minutes.. http://t.co/sO1hZFBgde $XLF #ETF #ETFs #Stocks
Top ETF Funds
20 Aug 14 15:57:28
[video] Six crazy facts about debt in the United States.. http://t.co/G7p9uGoX2M $XLF #ETF #ETFs #Stocks
Market News
20 Aug 14 15:55:46
$XLF: Careful, financials are breaking down relative to the S&P 500 http://t.co/toxiU0MQRB http://t.co/gPoormTYes
20 Aug 14 15:31:06
$XLU Dividend http://t.co/zgnE1VQXMW Also See: $TLT $JDST $HFC $XLF ~
Rosner Stocks
20 Aug 14 15:25:57
$XLF Exchange http://t.co/h5Vxrr6krj Also See: $SBUX $DIS $XLU $WTSL ~
Jeff Quiggle
20 Aug 14 15:19:00
Langan Stocks
20 Aug 14 15:18:29
$XLF Current Price http://t.co/KzIBZ5IXQz Also See: $MTVX $PANW $BIR.TO $EEM ~
Investors Hangout
20 Aug 14 14:59:02
$XLF Day Low http://t.co/bGy82GQo3c Also See: $JRJC $JD $LOW $AA ~
20 Aug 14 14:57:22
$XLF Ex-Div Date http://t.co/zGQ7Gq4ted Also See: $UCO $SINA $SLW $IWM ~
20 Aug 14 14:56:58
$XLF P/E Ratio http://t.co/ra16msiuZV Also See: $FB $URI $CSCO $HYG ~
Stock Headlines
20 Aug 14 14:55:46
$XLF: No One Loves the Banks, Should You? http://t.co/fBrJOXMHfH http://t.co/IcYIo4pS1p
Stock Forums
20 Aug 14 14:31:57
$XLF P/E Ratio http://t.co/0tJ1OqDnKA Also See: $GBGM $GLD $FEYE $MBLY ~
20 Aug 14 14:31:47
Top Shorted Stocks 08/20/14... 8. $KBH 69.14% 9. $XLU 68.66% 10. $XLF 68.35% 11. $QQQ 68.13% 12. $SPY 67.96% 13. $UNG 67.70%...
20 Aug 14 14:31:45
Top Shorted Stocks 08/20/14... 10. $XLF 68.35% 11. $QQQ 68.13% 12. $SPY 67.96%... http://t.co/nycxjWf602
Chasing Stars
20 Aug 14 14:20:33
$XLF E.P.S. http://t.co/DePX0zW7TQ Also See: $FB $AGQ $FB $URI ~
Declan Fallon
20 Aug 14 13:56:54
#sectorbreadth [80] $XLI > $XLP > [70] $XLU > $XLF > $XLY > $XLV = $XLB> [60] $XLK > [50] $XLE. $SPX bullishness up to 73%
Stock Updates
20 Aug 14 13:55:46
$XLF: No One Loves the Banks, Should You? http://t.co/V7Hp4077wE http://t.co/eDgi4JkfgB
20 Aug 14 13:33:35
Index/Sectr $DIA, $SPY, $QQQ, $IWM, $XLB, $XLE, $XLF, $XLI, $XLK, $XLP, $XLU, $XLY, $XRT, $XLV, $IYT http://t.co/nTkdtpMWP6
Top ETF Funds
20 Aug 14 13:21:37
Careful, financials are breaking down relative to the S&P 500.. http://t.co/WEijrtKqCZ $XLF #ETF #ETFs #Stocks
Top ETF Funds
20 Aug 14 13:21:21
Seven Years Later: What Does the Fed Know?.. http://t.co/6ao5wZvAG5 $XLF #ETF #ETFs #Stocks
Top ETF Funds
20 Aug 14 13:21:06
[video] Bank of America reaches $17 billion settlement: AP.. http://t.co/mIU3hBrUHS $XLF #ETF #ETFs #Stocks
Top ETF Funds
20 Aug 14 13:20:51
ETF Investors Shrug Off Volatility in Bullish Conditions.. http://t.co/5rb1WMXmiB $XLF #ETF #ETFs #Stocks
Top ETF Funds
20 Aug 14 13:20:35
[video] BofA reaches $17 billion settlement with DOJ.. http://t.co/9Oq9OlQznt $XLF #ETF #ETFs #Stocks
Top ETF Funds
20 Aug 14 13:20:20
[video] Countrywide's Mozilo reportedly faces lawsuit.. http://t.co/fkb9zoImOZ $XLF #ETF #ETFs #Stocks
20 Aug 14 13:14:56
“NEW POST: Financials Are Breaking Key Support relative to the S&P500 http://t.co/Xr7pFxFv1w $XLF $SPY http://t.co/2phURYG3YB”
Rita Hess
20 Aug 14 13:03:17
$$ Watching $XLF level 11.40. If that is broken then I see a run down to around 10.20-10.40 area.
Hedge Accordingly
20 Aug 14 12:55:05
$BAC $XLF 'it is over' “@Reuters: BofA in $16.5 billion deal with U.S. over mortgage bonds: source http://t.co/dKB1IZj0LZ”
By  +Follow December 9, 2013 1:47PM



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