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Financial ETFs Set to Rally in Earnings Season


Financial stocks have risen, which means good news for equities.


After days of discussion on the fiscal cliff finally coming to an end, investors are now turning their attention to the earnings announcements. Leaving aside all technical and basic factors that impact prices of stocks, it is the earnings of companies that have traditionally been impacting stock price movements.

At the cusp of the heart of earnings season, investors are keenly following the financial sector. The financial sector is said to be the leading indicator of the overall market. Financials, as a matter of fact, may prove to be a good investment opportunity this earnings season.

Lately the sentiment for the sector has been quite bullish. The recent rally in the equity market was mostly attributable to the performance of financial stocks.

In fact, financial sector ETFs were one of the best performing sectors in 2012; if the numbers from bank stocks come in positive, the sector may sustain its relative strength this earnings.

After posting poor results in the second quarter, bank stocks tapped the growth momentum in third-quarter earnings. In the third quarter, banks reported solid growth in profits not seen in the last six years. Profits surged nearly 7% in said quarter.

The momentum is likely to continue in the final quarter of the year. In fact, banks are expected to post double-digit growth this quarter. Investors should further note that after three years, the rise in profits would issue principally from traditional sources of revenue rather than from curtailed funds reserved for bad loans.

The last few sessions actually saw the financial sector ETFs on the verge of a breakout. If the numbers from the banks do not disappoint, these ETFs may break out yet again, forming new highs.

Earlier in the season, Wells Fargo (NYSE:WFC) was the first major financial institution to report earnings. The bank reported strong numbers with profits gaining 24% and revenue beating expectations. However, the low interest rates have continued to impact the bank's margins.

With upbeat results from Wells Fargo and expectation of double-digit growth in earnings from other financial houses, investors may opt to capitalize on the gain in ETF form instead of tracking individual banks.

For investors who believe that financial institutions will post solid numbers this quarter and ETFs tracking the financial sector will do good business this earnings, any of the following three financial ETFs could make for an interesting pick at this time.

Financial Select Sector SPDR (NYSEARCA:XLF)

XLF is one of the most popular ETFs tracking the financial sector and has been in the limelight because of its remarkable performance of late. The ETF is continuously trying to break out from its highs post crisis.

The five major financial institutions that are scheduled to report earnings this week are amongst the top holdings of XLF. Positive numbers from these banks could result in the ETF breaking out and setting new highs. WFC, which reported earnings last week occupies the third position in the fund.

The fund manages an asset base of $10.5 billion and trades at volume levels of more than 38 million shares per day. The fund is home to 82 financial stocks with JPMorgan Chase (NYSE:JPM), Berkshire Hathaway (NYSE:BRK-A), and Wells Fargo comprising the top three holdings.

The fund has performed exceptionally well in the last one year, delivering a return of 23%. The fund charges a fee of 18 basis points annually.


KBE is another SPDR ETF offering exposure to bank stocks; however, unlike XLF, this ETF present a somewhat narrow exposure to banking stocks, covering 42 stocks in the banking space.

Managing an asset base of $1.7 billion, the fund does not appear to be as popular as XLK as indicated by its trading volume of more than 1.3 million shares. Also XLF has an edge in expenses compared to KBE, which charges a fee of 35 basis points annually.

Comerica (NYSE:CMA), Citigroup (NYSE:C), and KeyCorp (NYSE:KEY) occupy the top three positions in the fund while Bank of America (NYSE:BAC) gets the fifth position. The fund's performance has been quite remarkable in the last one year, delivering a return of 17%.

PowerShares KBW Bank Portfolio (NYSEARCA:KBWB)

One ETF to watch is KBWB as Bank of America and Citigroup are two key components of the fund, and the duo account for roughly 20% of the total assets. Meanwhile, another big bank, JPMorgan, occupies the third position, so this ETF could definitely be driven by earnings.

The fund manages an asset base of $105 million and is home to a very small basket of 24 companies. KBWB charges a fee of 35 basis points annually and has delivered a return of 32.4% over a period of one year.

Currently, KBWB is trading near its all-time high. This suggests that the bullish momentum is still very much there and the ETF is all set to rally going forward as push further into 2013.

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No positions in stocks mentioned.
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