If you’re looking to stake out a claim in the recovery, financial stocks are a very good bet right now. Thus, the Financial SPDR (XLF) should be on your radar during the second half of 2013.
Why? For starters, financial stocks are inherently cyclical in nature; they do best when the economy is humming along, which causes investment and lending to hum along, too.
Also, the fundamentals still are cheap. Compared with other sectors, banks remain undervalued based on forward earnings. Investors have been discounting bank shares since the financial crisis for obvious reasons, but this can’t last forever.
Also remember that dividends have remained pretty anemic in the sector thanks to the red tape of the Federal Reserve “stress tests,” so there’s the potential for payouts to move up significantly in the years ahead. Consider that Bank of America (BAC) and Citigroup (C) pay a nominal penny per quarter on each share of stock. That can and will move upward.
There is the risk that a downturn could hurt banks, of course, but the XLF is focused on major financial institutions and shouldn’t see the same risk as regionals or smaller banks. After all, there have been many complaints about “too big to fail” … but the hard truth is that major financials cannot and will not be allowed to collapse no matter what happens in the next few years. That’s just the way it is.
With a very low expense ratio of 0.18%, or just $18 on $10,000 invested, this is a great way to play the sector.