In countless recaps we talked about the mammoth rally that has taken place in Financials since Trump was elected last November, with XLF (SPDR Financial Select Sector, Expense Ratio 0.15%) outperforming the broader S&P 500 by more than 1200 basis points in the trailing six-month period.
However, thanks to a stumble throughout the month of March, XLF has fallen back to earth a bit and is actually underperforming the S&P 500 by more than 300 basis points. What has changed here since XLF traded higher than $25 briefly at the end of February?
Today, interest rates are roughly where they were at the end of February, so we do not believe that this is a factor, but there could be some concern looming that the sector perhaps ran too far, too fast, and we are expecting quarterly earnings reports from the top holdings in the sector in the near term.
The top holdings of XLF are currently 1) BRK.B (10.89%, expected earnings 5/29), 2) JPM (10.58%, 4/13), 3) WFC (8.90%, 4/13), 4) BAC (8%, 4/18), 5) C (5.56%, 4/13), 6) GS (2.96%, 4/18), 7) USB (2.94%, 4/19), 8) AIG (2.19%, 5/16), 9) MS (2.14%, 4/17), and 10) CB (2.14%, 4/25), and earnings reports for these companies all clearly fall within the window between now and June options expiration.
This brings us to our next point, which is a mention of what we have been seeing in options markets, including some June 22 put buying in XLF. Given XLF is trading at around $23.60 currently, these options are clearly out-of-the-money, but there are more than two months left until expiration, and one would capture access to significant events in the next several months — including the bevy of corporate earnings that we mentioned previously.
Year-to-date, XLF has still seen net inflows ($870 million in), but the fervor that existed from November through much of February in investors buying up the sector has certainly abated some. Given the presence of early summer options buyers in the sector going into next week’s earnings in Financials, we are closely watching several “Bear” funds in the space for increased activity, such as: FAZ (Direxion Daily Financial Bear 3X, Expense Ratio 0.95%, $239 million in AUM), SKF (ProShares UltraShort Financials, Expense Ratio 0.95%, $46 million in AUM), SEF (ProShares Short Financials, Expense Ratio 0.95%, $25 million in AUM), and FINZ (ProShares UltraPro Short Financials, Expense Ratio 0.95%, $2.1 million in AUM).
The Financial Select Sector SPDR Fund (NYSE:XLF) was trading at $23.64 per share on Tuesday morning, down $0.04 (-0.17%). Year-to-date, XLF has gained 1.68%, versus a 5.24% rise in the benchmark S&P 500 index during the same period.
Disclaimer: The content of this article is excerpted from a daily newsletter from Street One Financial. While ETF Daily News may edit the contents and add a relevant title to the piece, the author, Paul Weisbruch, does not endorse or recommend any issuer or security mentioned herein.
Paul Weisbruch is the VP of ETF/Options Sales and Trading at Street One Financial. Prior to joining the team at Street One, Paul served as the Director of RIA and Institutional ETF Sales at RevenueShares ETFs from December 2007 until November of 2009. Before RevenueShares, Paul was employed by Susquehanna International Group from 2000 until 2007 serving in roles including OTC/NYSE Institutional Block Trading, Nasdaq/OTC Market Making, ETF/Derivatives Intelligence and Strategy, Algorithmic Trading, as well as acting as the PHLX Floor Specialist in the ETFs, SPY and DIA.Paul has been actively involved in the ETF space from both a product and trading standpoint since 2000. Additionally, Paul has well forged relationships with national RIAs, institutional pension fund managers and consultants, mutual fund and hedge fund managers, and also the ETF media. Co-authoring the “S1F ETF Daily” since 2009, the daily piece has become a must for many portfolio managers in the ETF space, with segments regularly appearing in the likes of Barron’s, WSJ, and ETFTrends.com for instance.
He holds his Series 4 (Registered Options Principal), 6, 7, 55 (Equity Trader), 63, and 65 licenses. He graduated from the University of Pittsburgh (B.S. – Economics), graduating magna cum laude, and has an MBA from Villanova University.