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

By  +Follow December 9, 2013 1:47PM
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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
Cirrus Radiatus
26 Nov 14 06:12:38
Check out my Two-Dimensional #ETF Trendscreener (1 Pic.) $SPY $GDX $EEM $IWM $USO $XLF $XLE $EWZ $QQQ $GDXJ $XLU http://t.co/686CovcJln
Nancy Boots Davison
26 Nov 14 06:09:53
RT @OptionsFlux: $XLF Jan. 17, 2015 CALL 25.00 : +54.794 CONTRACTS
Options Network
26 Nov 14 06:00:00
RT @OptionsFlux: $XLF Jan. 17, 2015 CALL 25.00 : +54.794 CONTRACTS
BingoChart
26 Nov 14 05:55:24
RT @JaguarAnalytics: $XLF Jan 2015 $25 Call Open Interest climbs from 32,944 to 87,738
OptionsFlux
26 Nov 14 05:53:08
$XLF Jan. 17, 2015 CALL 25.00 : +54.794 CONTRACTS
JaguarAnalytics
26 Nov 14 05:50:43
$XLF Jan 2015 $25 Call Open Interest climbs from 32,944 to 87,738
ETF Trends
26 Nov 14 05:31:02
Gold Miner Splits, Turkey Day Trade Ideas, Hedging EM Currencies, Big Banks, India Shines $JNUG $XLF $HSPX $SPY $DBEM http://t.co/emjRXcDBEw
David Teolis
26 Nov 14 05:15:11
RT @aarontask: .@michaelsantoli and I discuss why Thurs #OPEC meeting is the most important in years (and what it means for $XLF) http://t.…
Maleah
26 Nov 14 04:14:11
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Polyticks
26 Nov 14 01:08:47
RT @aarontask: .@michaelsantoli and I discuss why Thurs #OPEC meeting is the most important in years (and what it means for $XLF) http://t.…
ActiveVols
26 Nov 14 00:43:21
Mornin' from Dublin!! Time to clean out rags of no/low #Delta Dec 20 puts = All about Jan 17 2015's from here on $SPY $QQQ $XLK $XLF $VIX
TV_Trading Ideas
26 Nov 14 00:33:15
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Jeff Quiggle
25 Nov 14 22:28:52
10-Sector > $ITB $XLP $XLI $XLK $XLY $XLF $XLV $XLB $XLU $XLE Yesterday > $XLP $XLI $XLK $ITB $XLF $XLY $XLV $XLB $XLU $XLE
Maleah
25 Nov 14 21:18:04
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25 Nov 14 21:00:24
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Maleah
25 Nov 14 20:11:44
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Mike Zaccardi, CMT
25 Nov 14 19:36:45
@gapandyap $XLF went up 100%
Isabel Gonzalez
25 Nov 14 18:50:41
RT @SeekingAlpha: Leader Of The Pack (Weight Of Evidence, Part 5 Of 7) http://t.co/aMyQ8cN7ys $XLB $XLE $XLF $XLK $XLP $XLU $XLV $XLY
Alysia Sarkisian
25 Nov 14 18:39:11
RT @SeekingAlpha: Leader Of The Pack (Weight Of Evidence, Part 5 Of 7) http://t.co/aMyQ8cN7ys $XLB $XLE $XLF $XLK $XLP $XLU $XLV $XLY
Seeking Alpha
25 Nov 14 18:35:18
Leader Of The Pack (Weight Of Evidence, Part 5 Of 7) http://t.co/aMyQ8cN7ys $XLB $XLE $XLF $XLK $XLP $XLU $XLV $XLY
Maleah
25 Nov 14 18:29:19
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Maleah
25 Nov 14 15:42:18
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Krishna
25 Nov 14 15:40:31
RT @AmericanBanking: Investors Purchase Large Volume of Call Options on Select Sector Financial Slct Str SPDR Fd $XLF http://t.co/bD3oXboGkX
Sleek Money
25 Nov 14 15:08:18
Investors Buy Large Volume of Call Options on Select Sector Financial Slct Str SPDR Fd $XLF http://t.co/e1hUKnUaL5
Maleah
25 Nov 14 14:35:34
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WKRB News
25 Nov 14 14:27:26
Investors Purchase Large Volume of Call Options on Select Sector Financial Slct Str SPDR Fd $XLF http://t.co/k94eITTStw
Jesús
25 Nov 14 14:25:00
RT @sergionozal: El sector financiero sigue liderando la subida y los MidCap entran a escena $XLF $MDY
US Banking News
25 Nov 14 14:24:40
Investors Purchase Large Volume of Call Options on Select Sector Financial Slct Str SPDR Fd $XLF http://t.co/bD3oXboGkX
Scott Smith
25 Nov 14 14:14:57
$TRAN The great fall that many traders thought would end it all... $QQQ $DIA $IWM $SPY $XLF $STUDY http://t.co/YpEFWOxy1g
The Stock Whisperer
25 Nov 14 14:09:10
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WallStreetConsensus
25 Nov 14 14:08:59
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ETrader
25 Nov 14 13:22:36
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Michael Santoli
25 Nov 14 12:47:29
RT @aarontask: .@michaelsantoli and I discuss why Thurs #OPEC meeting is the most important in years (and what it means for $XLF) http://t.…
tai nazer
25 Nov 14 12:40:49
RT @aarontask: .@michaelsantoli and I discuss why Thurs #OPEC meeting is the most important in years (and what it means for $XLF) http://t.…
Carlos Valdiglesias
25 Nov 14 12:39:59
RT @aarontask: .@michaelsantoli and I discuss why Thurs #OPEC meeting is the most important in years (and what it means for $XLF) http://t.…
Shane Gonzales
25 Nov 14 12:38:53
RT @aarontask: .@michaelsantoli and I discuss why Thurs #OPEC meeting is the most important in years (and what it means for $XLF) http://t.…
Yahoo Finance
25 Nov 14 12:32:27
RT @aarontask: .@michaelsantoli and I discuss why Thurs #OPEC meeting is the most important in years (and what it means for $XLF) http://t.…
Aaron Task
25 Nov 14 12:03:15
.@michaelsantoli and I discuss why Thurs #OPEC meeting is the most important in years (and what it means for $XLF) http://t.co/Phvsch412c
Investors Hangout
25 Nov 14 09:44:34
Emylers: $XLF Up to date company activities and other http://t.co/2OoF70eQWK
lookn4wins
25 Nov 14 09:36:30
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Emylers
25 Nov 14 09:16:37
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lookn4wins
25 Nov 14 08:59:40
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DennyT
25 Nov 14 07:47:28
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danrocks
25 Nov 14 07:25:53
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lookn4wins
25 Nov 14 07:19:33
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Jake13
25 Nov 14 07:07:19
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leahanne
25 Nov 14 07:02:52
$ANR Alpha Natural Resources (ANR) 2.38 -0.06 (-2.46%) $BLTA $UUP $XLF http://t.co/6BDbsznevy
danrocks
25 Nov 14 06:52:22
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Don_A
25 Nov 14 06:44:34
$XLF green to red. 24.29 needs to hold for bulls here
Tim Ikels
25 Nov 14 06:09:25
$XLF | Financials > on may radars this morning.... watch! #ITradeNaked #price #action
				
				
By  +Follow December 9, 2013 1:47PM
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