I’m not going to win the ETF Contest this year with the Financial Select Sector SPDR Fund (NYSEARCA:XLF), but I’m about even with a rising market.
The exchange-traded fund, which tracks the S&P Financial Select Sector Index, is up almost 20% year-to-date, against an average S&P 500 stock gain of 21.2%. It’s still beating the Dow Jones Industrial Average, up 17.7%.
Technology funds have been much bigger winners in 2019 than bank stocks. But XLF isn’t doing badly given the interest rate environment — with the Federal Reserve having already made two rate cuts and poised for a third in December.
In short, I’ve missed on the macro trend, but I’m in good shape.
XLF is a great fund for safety. Given that I turn 65 in January, I should be focusing on capital preservation, rather than long-term capital gains. I don’t have as much time left as my kids.
My original bet was that we’d have had a panic by now, with banks acting as the fire brigade.
The panic has yet to start. Instead the market has melted up. I knew I was in trouble in March, because the deflation was already hurting the banking sector. By June I was looking to bank mergers to increase my gains. But as this is written, we’re still waiting on BB&T (NYSE:BBT) to finish gobbling SunTrust Banks (NYSE:STI) to create something like Trest (which sounds like a toothpaste).
XLF has as much of its money in insurance stocks as it has in bank stocks. Its largest holding is Berkshire Hathaway (NYSE:BRK.B), representing 12.4 of its $21.1 billion of assets. JPMorgan Chase (NYSE:JPM) represents 11.8% and Bank of America (NYSE:BAC) represents 8%. That’s almost one-third of the XLF ETF’s assets right there.
In any ETF you’re going to get some losers as well as winners. Approximately 11% of XLF’s money is in Wells Fargo (NYSE:WFC) and Citigroup (NYSE:C). But that’s the way these funds work. The expense ratio is only 0.13%, meaning the house isn’t taking much of your bet. The fund is widely dispersed, holding stakes in 68 different companies.
An active investor might prefer to load up on winners like JPMorgan and dump losers like Wells Fargo, but that’s not the way ETFs work. It’s so simple to manage that a computer can do it — and it does.
Is Danger Ahead?
Looking ahead, the biggest danger for the big banks remains the fact that you no longer have to be a bank to provide banking services.
Thus, JPMorgan Chase is no longer the most valuable financial stock. That honor goes to Visa (NYSE:V), the payment processor, which now has a market cap of almost $396 billion against JPM’s $382 billion. It’s still behind Berkshire Hathaway’s $513 billion, but for how long?
Even newer fintech companies, like Square (NYSE:SQ), with a market cap of $25 billion, are reaching the size of banks like SunTrust (which has a market cap of $30 billion). They’re also taking over bank niches like small business loans, because processors have all the data needed to make decisions before applications are filed.
Bottom Line on the XLF ETF
The theme of 2019 is that software is swallowing the world. This is as true in banking as anywhere else.
It’s not yet true in insurance. So far, computers are only cutting sales costs and helping maintain loss ratios at companies like Berkshire Hathaway’s Geico unit and Progressive (NYSE:PGR), which represents 1.4% of XLF’s holdings.
But that will change. Investors need to be ready for the change. When we place our bets for the year 2020, I will be.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear , available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in JPM.