After an extremely rough phase in the financial crisis, the financial sector has come back strong and has been on a bull run since late 2012. In fact, the recent rally in the equity market was mostly thanks to the performance of the financial stocks.
Banks have bounced back following a series of hedging losses and scandals, surging almost 200% over the last four years. Sound balance sheets, an improved asset market backdrop, and lower loss provisions were the major contributors to this advancement. Admittedly, a lot remains to be done in order to reach the pre-crisis levels, though many appear on their way to these marks.
From a sector perspective, financials have been the star performer in the second quarter with a beat ratio of 76.9% for earnings and 61.5% for revenues (read: 3 Bank ETFs Leading the Pack this Earnings Season). Total earnings for the sector went up 30% on 8.5% higher revenues in the second quarter.
In fact, if we remove finance from the pack of all sectors, the growth picture becomes much weaker in the second quarter on a sequential basis. Coming to discuss the forward scenario, the sector is expected to post 16.9% in earnings growth for 2013 and 8.7% in revenue growth for 2014.
Also, financials have accounted for the largest increase in dividends in the last three years, making them an intriguing income play to top things off.
Given this bullish trend, a look at some of the top ranked ETFs in the space could be a good way to target the best of the segment with lower levels of risk. Investors looking to tap this segment in basket form can invest in the Vanguard Financials ETF (NYSEARCA:VFH) which is a Zacks ETF Rank #1 (Strong Buy) fund with a ‘Low’ risk outlook. We expect it to outperform its peers over the next year, and to continue posting solid returns heading into the end of 2013.
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box or asset class. Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely Low, Medium or High.
The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of the five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk.
For investors seeking to apply this methodology to their portfolio in the financials space, we have taken a closer look at the top ranked VFH. This ETF has a Zacks ETF Rank of 1 or ‘Strong Buy’ and is detailed below: