Finance ETFs For Rising Consumer Confidence

Includes: IYF, IYG
by: Tom Lydon

The financial sector appears to have turned over a new leaf as the country takes more conservative measures in response to the 2008 financial crisis. Consequently, consumer finance exchange traded funds are looking much healthier.

"We have a positive view on the consumer finance sub-sector," writes Sonia Parechanian, S&P Capital IQ Equity Analyst, in a research note. "We have seen the consumer deleverage and household savings rates rise, and consumers appear to be prudently cautious in taking on new debt. Also helpful, the housing market appears to be rebounding."

A number of economic indicators also points to a stronger financial sector. For instance, the Conference Board Consumer Confidence Index is up to 69.6 in February from 58.4 in January. According to the Conference Board, those anticipating jobs in the months ahead rose to 16.7% in February from 14.4% in January. Consumer credit outstanding increased to 7.0% in January from 5.9% over 2012.

The consumer finance sub-industry sector gained 29.9% in 2012, outperforming the 13.7% rise in the S&P 1500. However, the sub-sector has fallen behind the broader market so far this year.

The S&P analysts, though, believe that the risk averse marketplace will be the sector's next challenge.

"In our view, the key to unlocking appetite for loan growth may be less about marketing (as was the case pre-recession) and more about consumer confidence, home values, the ability to sell a home, having a job that pays more than the bills, and having job options," Parechanian added.

The S&P analysts have an "overweight" rating on two ETFs that focused on consumer finance companies, including the iShares Dow Jones US Financial Sector Index Fund (NYSEARCA:IYF) and iShares Dow Jones US Financial Services Index Fund (NYSEARCA:IYG). Both funds have an expense ratio of 0.47%.

The IYG ETF is 100% equity while the IYF ETF is 76% domestic equity, 4% international equity and 20% real estate. Both funds have significant exposure to JP Morgan Chase, Wells Fargo, Citigroup, Bank of America, Visa Inc, Goldman Saches Group, U.S. Bancrop and American Express. However, IYG is more top heaving, with its top 10 holdings accounting for 60% of the ETF's portfolio, whereas IYF's top 10 holdings make up 39% of assets.

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.