Financial-sector ETFs bet on a possible interest-rate hike pays off

Financial-sector ETFs bet on a possible interest-rate hike pays off
Performance anticipation push financials to the head of the pack in August.
SEP 12, 2016
With the most recent employment report coming in weaker-than-expected, the odds of an interest-rate hike in September have dropped into “unlikely” territory. But don't tell that to investors in financial-sector exchanged-traded funds. Similar to the run-up to the Federal Reserve's modest December rate hike, financial sectors ETFs have become a suddenly hot commodity. Financial-sector ETFs saw $1.4 billion in net inflows last month, followed by energy-sector ETFs at $1.1 billion. The assets moved virtually in stride with performance in August, but it was likely less about performance chasing than it was about performance anticipation. “Financials are among the sectors that benefit the most from interest rates moving higher,” said Todd Rosenbluth, director of ETF research at S&P Global Market Intelligence. So far this year, the financial sector of the S&P 500 Index has gained just 2.7%, while the broader index is up 6.2%. The best-performing sectors this year have included a 7.3% gain by consumer staples, a 13% gain by utilities, and a 14.9% gain by telecommunication services. Such higher-dividend-paying equity sectors tend to appeal to investors as proxies for bond income when interest rates are low. But that trend suddenly reversed in August when a possible Fed move at some point this year seemed to gain some credibility. The financial sector gained 3.6% in August, while the broader S&P dropped 0.1%, consumer staples fell 0.7%, utilities fell 6.1%, and telecommunication services fell 5.7%. Financial stocks are seen as among the most obvious and direct beneficiaries of a Fed move because higher rates will expand their profit margins. Some of the financial-sector ETFs that benefited from the increased investor appetite were Vanguard Financials (VFH), which took in $501 million in August, Financial Select Sector SPDR (XLF) had $471 million in inflows, and SPDR S&P Bank (KBE) took in $235 million. “What we saw in August was the perception that a September rate hike was on the table intensified,” said Christian Magoon, chief executive officer of Amplify ETFs. But as the humbling jobs numbers have been digested by market watchers, pushing any realistic hope of a rate hike off until at least December, Mr. Magoon believes investor appetite for financial-sector stocks could begin to fade. “As has been the case for several years now, investors trying to time a Fed rate hike appear to be premature,” he said. That might be the case, but for those investors that tried to game a September hike by jumping into financials last month, the results are almost as good as a rate hike.

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