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XLF: Time For Financial Sector To Catch Up


  • SPDR Financial Sector ETF has drastically underperformed broader market in 2020 on weak earnings and plummeting interest rates.
  • The banking sector is not facing a systemic crisis like in 2008 based on the TED spread.
  • Many of XLF's top holdings are trading at deep discount with price-to-book ratios below one.
  • XLF looks set to outperform the broader market on turnaround in value stocks and long-end bond yields.

After finally breaking through weeks of sideways consolidation, May turned out to be another banner month for major stock market indices, punctuated by the S&P 500 (SPY) recapturing the key 3000 level and 200-day moving average last week. Yet, the same cannot be said for the financial sector (NYSEARCA:XLF), which failed to take off and remains stuck under its April highs. In fact, the underperformance in XLF began prior to the coronavirus pandemic, and intensified during and after the crash:

Source: WingCapital Investments

Indeed, as we wrote prior to the coronavirus crisis taking hold, the inversion of the Treasury yield curve already telegraphed a rough year ahead for XLF. Specifically, we observed that XLF had begun lagging the SPY in mid-2007 soon after the yield curve inverted:

Source: U.S. Department of Treasury, WingCapital Investments

Conditions were ripe for a significant pullback in XLF and COVID-19 turned out to be the trigger, just as the subprime crisis started the onslaught back in 2007. Weak earnings have also justified the drastic underperformance in financials, which is one of several sectors with -30% or worse earnings growth rate according to Refinitiv:

S&P 500 Y/Y Earnings Growth Rates by Sector

Source: Refinitiv

Large increase in loan loss provisions has contributed to the sharp profit declines for the banking sector, which accounts for more than 30% of XLF's exposure. Meanwhile, top holding Berkshire Hathaway Inc. (BRK.B) (~14% weight) was hammered by the $55 billion loss in its stock portfolio. On aggregate, XLF's top 15 holdings' EPS growth declined by more than -15% and is expected to remain in the negative next year. On a more positive note, strong earnings from non-bank names, such as CME and ICE from the exchange sector, have helped limit the damage.

Symbol Name % Weight Revenue Growth (YoY) Revenue Growth (

This article was written by

Quantitative Strategies utilizing Empirical Analysis, Pattern Recognition and Statistical Arbitrage techniques. Identifies high-probability long/short opportunities with short-medium term horizon in large caps, ETFs, commodities and FX. Macro Commentary and Market Research.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in XLF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

We may have options, futures or other derivative positions in the above tickers mentioned.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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