The Financial Select Sector SPDR Fund (XLF) provides investors with targeted exposure to the US financial sector, which encompasses industries such as banking, insurance, investment services, and real estate. Launched in December 1998, XLF aims to track the Financial Select Sector Index, featuring some of the most significant financial companies globally.
The index itself aims to provide an effective representation of the financial sector of the S&P 500 Index.
The financial sector is a key part of an economy, providing essential services like lending, wealth management, and insurance. XLF enables investors to tap into the performance of major financial institutions, including JPMorgan Chase, Bank of America, and Berkshire Hathaway, making it a popular choice for those seeking exposure to the sector.
At the end of November, 2024, the Financial Select Sector SPDR Fund's total net assets were $52.89 billion. The fund currently holds 72 stocks.
Financial Select Sector SPDR Fund Performance, Price & Chart
The financial sector faces a mix of challenges and opportunities influenced by economic conditions, interest rate changes, and regulatory developments. Here are the bullish and bearish arguments:
Bull Argument: Reuters recently reported that a Goldman Sachs note showed hedge funds had been snapping up banking stocks at the quickest rate in three years in reaction to Donald Trump's election win. Goldman Sachs notes that Financial stocks are expected to get a lift from a lighter regulatory environment under the incoming President, while they are also predicted to benefit from the expected tax reform. “There is scope for US Financials positioning to rise further,” said Goldman.
Meanwhile, an analyst at Hovde said in November that he believes bank stocks have more room to run higher, highlighting the same factors as Goldman Sachs. “We feel that more room for multiple expansion exists if history serves as a guide,” the firm said.
Bear Argument: When assessing the potential bear case, it is important to be aware that economic uncertainty, including the risk of a slowdown, could weigh on the sector’s performance. This is because when economic activity slows, banks' earnings are generally tied to borrowers' ability to repay their loans. In addition, they are tied to consumers' and businesses' appetite for more credit.
Furthermore, on the flip side of the Goldman Sachs argument, elevated regulatory scrutiny and stricter capital requirements may constrain profitability for major banks. Additionally, rising competition from fintech disruptors poses a long-term challenge to traditional financial institutions.
Our View: The Financial Select Sector SPDR Fund provides broad and efficient exposure to the financial sector, making it a strong choice for investors looking to capitalise on the growth of banking, insurance, and investment services. While the sector is cyclical and sensitive to macroeconomic conditions, XLF's holdings of top-tier financial firms offer stability and potential for long-term growth.
Financial Select Sector SPDR Fund Performance, Price & Chart
The financial sector's performance is closely tied to economic cycles, interest rate trends, and market sentiment. XLF has historically delivered strong returns during periods of economic expansion but is also subject to cyclical volatility, as you can see from its performance over the last few years.
| Year | Performance |
|---|---|
| 2024 (YTD) | +37.87% |
| 2023 | +12.02% |
| 2022 | -10.60% |
| 2021 | +34.82% |
| 2020 | -1.67% |
XLF Top Holdings (as of November 27, 2024)
| Company | Weight |
|---|---|
| Berkshire Hathaway | 13.40% |
| JP Morgan | 9.54% |
| Visa | 7.30% |
| MasterCard | 6.48% |
| Bank of America | 4.26% |
| Wells Fargo | 3.06% |
| S&P Global | 2.63% |
| Goldman Sachs | 2.49% |
| American Express | 2.42% |
| Progressive Corp | 2.37% |
Who Should Buy the Financial Select Sector SPDR Fund?
Firstly, as mentioned above, XLF is an attractive option for investors aiming to profit from economic growth, while income-focused investors will also stand to benefit, as many financial companies in XLF pay consistent dividends.
While the fund is focused on financials, it does cater somewhat to those seeking diversification through exposure to various financial sub-industries.
However, investors concerned about potential headwinds from regulatory and competitive pressures or the overall health of the economy may want to look elsewhere for now.
With its focused exposure to leading US financial institutions, XLF is an excellent choice for investors with a positive outlook on the financial sector and its role in driving economic growth.
