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Banking Earnings Soft: Buy Financial ETFs On Value?

The financial sector, which accounts for around one-fifth of the S&P 500 index, had a sluggish- to-decent Q3. Weak capital market activities and global growth worries along with a low interest rate environment dealt a blow to the space. However, modest gains in loan growth amid low interest rates, investment banking activities thanks to surge in corporate actions and cost containment efforts helped the space to stay afloat in the quarter. As evident from the big bank earnings, the sector has been an average performer. Per the Zacks Earnings Trend issued on October 14, financial earnings are expected to jump 9.6% this quarter on 3.7% lower revenues. To be more specific, easy comparisons at Bank of America Corporation or BofA (NYSE: BAC ) is leading the sector. Excluding Bank of America, results would have been much more muted than it looks now. Earnings would fall in absence of BofA’s stellar growth (read: Guide to the 7 Most Popular Financial ETFs ). Let’s take a look at the big banks’ earnings which released lately. Big Bank Earnings in Focus JPMorgan (NYSE: JPM ) reported earnings of $1.32 per share missing the Zacks Consensus Estimate by 4.4% and the year-ago earnings by 2.9%. Managed net revenue of $23.5 billion in the quarter was down 6% from the year-ago quarter. It also compared unfavorably with the Zacks Consensus Estimate of $23.8 billion. Goldman (NYSE: GS ) earned $2.90 per share in Q3, falling short of the Zacks Consensus Estimate of $3.08 per share and declining from the year-ago figure of $4.57. The shortfall in earnings reflected a fall in revenues, hurt by lower trading activity in the quarter, be it bonds, currencies or commodities (read: 3 Sector ETFs Hit Hard by the Market Sell-off ). Net revenue dived 18% year over year to $6.9 billion for the quarter. Revenues also lagged the Zacks Consensus Estimate of $7.3 billion. Lower net interest as well as non-interest income weighed on the top line. Citigroup Inc.’s (NYSE: C ) adjusted earnings per share of $1.31 for the quarter outpaced the Zacks Consensus Estimate of $1.29. Further, earnings compared favorably with the year-ago figure of $0.95 per share. Adjusted revenues of Citigroup declined 8% year over year to $18.5 billion. Also, the revenue figure missed the Zacks Consensus Estimate of $18.76 billion. Wells Fargo (NYSE: WFC ) earned $1.05/share in 3Q15 beating the Zacks Consensus Estimate by a penny. The reported figure was also above the year-ago number of $1.02 per share. The quarter’s total revenue came in at $21.9 billion, outpacing the Zacks Consensus Estimate of $21.5 billion. Moreover, revenues rose 3.3% year over year. Bank of America Corporation’s third-quarter earnings of $0.37 per share outdid the Zacks Consensus Estimate of $0.34. Further, the bottom line witnessed a significant improvement from net loss of $0.04 incurred in the prior-year quarter. Net revenue of $20.7 billion was down 2% year over year and met the Zacks Consensus Estimate. ETF Impact Despite a run of listless results from banks this week, the concerned ETFs buoyed up on the recent Fed-induced optimism. Most U.S. financial ETFs returned at least 1% since the earnings came out (as of October 15, 2015). All the aforementioned companies have considerable exposure in funds like the i Shares U.S. Financial Services ETF (NYSEARCA: IYG ) , the PowerShares KBW Bank Portfolio ETF (NYSEARCA: KBWB ) , the Financial Select Sector SPDR ETF (NYSEARCA: XLF ) , the iShares U.S. Broker-Dealers ETF (NYSEARCA: IAI ) and the Vanguard Financials ETF (NYSEARCA: VFH ) . All the funds are in green post big banks’ results, having returned in the range of 1─1.8% (as of October 15, 2015). It seems that investors are paying more heed to the market rally which could boost the weakling of this quarter – trading activities, going forward. The bond market is also displaying a strong trend on a dovish Fed and a delayed rate hike possibility. This could go in favor banks’ client activity in the fourth quarter. In any case, sooner or later, the U.S. economy is due for a lift-off and U.S. banks are now much more well-balanced than they were at the time of the last recession. All the aforementioned ETFs apart from IAI have a Zacks ETF Rank # 2 (Buy), sport compelling valuation and thus emerge as better plays than an individual stock pick. Link to the original post on Zacks.com

2 Sectors To Explore When Rates Rise

Though the recent market selloff and declining inflation expectations have lowered the probability of the Federal Reserve (Fed) raising rates right away, the exact timing of the hike isn’t as important as the market implications of moderately higher interest rates, which are expected to eventually arrive. While the recent market selloff and declining inflation expectations have lowered the probability of a September Federal Reserve (Fed) rate rise, “good enough” U.S. economic data still support Fed liftoff occurring later this year. However, the exact timing of the hike – September, December or even early 2016 – isn’t as important as the market implications of moderately higher rates, which are expected to come sometime soon. Though the Fed is likely to raise rates gradually, higher short-term rates will ripple through the markets and affect a wide range of financial assets, including stocks. The actual liftoff event will most likely lead to more short-term U.S. stock market volatility , so investors should expect a continued bumpy ride in the months ahead. That said, I do see potential opportunities in two particular U.S. sectors. Technology Sector Technology companies hold a staggering 40 percent of the total corporate cash reserves in the U.S., according to Forbes, so they’re much less vulnerable to rising rates than debt-laden firms, such as utilities, according to Bloomberg data as of 07/13/2015. Their strong cash positions mean they have the potential to continue on with their shareholder-friendly policies , such as share buybacks, dividend increases and M&A activity. In addition, while tech valuations have risen in recent months , current levels suggest that there may be additional room to run. As of last month, tech companies, as measured by the S&P 500 Information Technology Index, traded with a 6 percent price-to-earnings (P/E) discount to the S&P 500, well below the trailing 10-year average of a 12.7 percent P/E premium, according to Bloomberg data. Financials Sector (Excluding Rate-Sensitive REITs) For some financial institutions, namely banks, higher rates could potentially translate into higher revenues. In an environment of rising rates, the difference between what banks make from lending (their revenue) and what they pay for deposits (their costs) may increase, so banks potentially stand to increase profits. In addition, in anticipation of higher rates, many banks have begun to reposition their balance sheets toward variable rate loans, so they won’t be locked into low interest rates, and they’re hedging their interest rate exposure, according to banks’ most recent earnings reports and earnings calls with analysts. It’s also worth noting that U.S. financials were the bright star of second-quarter earnings – roughly 60 percent of financials beat revenue expectations, well above the overall sector average, according to Bloomberg data. Beyond strong earnings, financials also represent a relative bargain compared to some other sectors. For instance, the financial sector is still among the cheapest S&P 500 sectors in both P/E and price to book (P/B) terms, and its P/B ratio is just half that of the broad U.S. market, according to Bloomberg data. Finally, both U.S. technology and U.S. financials are cyclical sectors. When the economy is strong, as it tends to be in a rising rate environment, cyclical stocks typically outperform . In contrast, defensive sectors (think utilities) tend to outperform the broader U.S. market when economic growth slows, and as rates rise, they can be vulnerable, given that they may have significant debt loads. Exchange traded funds (ETFs), such as the iShares U.S. Technology ETF (NYSEARCA: IYW ) and the iShares U.S. Financial Services EFT (NYSEARCA: IYG ), can provide access to the U.S. Tech and U.S. Financials ex-REITs sectors. This post originally appeared on the BlackRock Blog.