Six Reasons to Now Consider Buying Financial ETFs

Includes: IPF, IXG, IYF, PGF, XLF
by: Tom Lydon

The broader market has been performing well in recent months, with the S&P 500 experiencing a nice 11% gain from the beginning of September, but financial stocks and related ETFs have not caught on to the bullish trend.

Still, Jeff Reeves for TheStreet argues that financials could make a big turnaround in the next few months, offering seven reasons why big banks may soon be a favorable investment opportunity, including:

  • More Dividends. The Federal Reserve says healthy banks may begin to raise dividend payouts for the first time since the financial downturn.
  • Earnings. Third-quarter profits surged for many large banking firms as banks saw improved credit quality, reduced bad debts and increased checking accounts.
  • Credit Markets. Improvements for the credit markets on both the consumer level and large business loans will translate to better earnings and fees from lending, fewer bad loan write downs and smaller loss reserves. Don’t forget the Fed’s stimulus plan, which will push yields down even further.
  • Better Balances. As the Fed eventually increases rates, Banks will able to increase their capital base and bring in conservative savers who are willing to earn 3% a year on a CD or high-yield savings account, which will help stabilize the banking industry, along with their share prices.
  • They’re Getting Conservative. Regulation has returned the get-rich-quick mindset of banks to a more conservative one again, writes Alex Brummer for Mail Online. It will be up to the more cautious banks that will be able to navigate the treacherous markets over the long-term.
  • Trend Lines. Many financial ETFs are above their 200-day moving average, though generally they’re a single-digit percentage above. According to our trend following strategy, this is a buy signal if it’s a sector you want to be in.

In the last six months, a number of financial ETFs are in the negative, so this sector still has a few kinks to work out. The top-performer is PowerShares Financial Preferred (NYSEArca: PGF), which is up 7.6% in the last six months. International financials have fared well, too; SPDR S&P International Financial (NYSEArca: IPF) is up 4.8% in the same time period.

Max Chen contributed to this article.

Disclosure: None