Interest rates

Interest rate rising? 2 financial ETFs to take advantage of hikes

Banks and other financial names have regained center stage on Wall Street this earnings season on the prospect of higher interest rates. Movements in these stocks naturally affect the prices of exchange-traded funds (ETFs) that focus on these stocks.

JPMorgan Chase (NYSE:) kicked off the Q1 season last week with a worse than expected which raised the eyebrows of investors. Profits of $8.28 billion meant a 42% drop from a year earlier. (NYSE:) and (NASDAQ:) two other banks missed analysts’ EPS expectations for the quarter.

Meanwhile, the actions of (NYSE:) jumped over 4% after posting better than expected First quarter financial data April 18. EPS of 80 cents beat analysts’ expectations.

Other banks that have exceeded Wall Street consensus EPS targets include (NYSE:), (NYSE:), (NYSE:), (NYSE:)and more recently, (NYSE:).

The benchmark is approaching 3% and is at multi-year highs. In such an environment, financial names receive heightened attention. These institutions borrow money on the short end of the curve but lend on the long end. As yield increases, the spread between deposits and loans generally benefits banks and improves their net interest margin.

Thus, many investors are still bullish on financial stocks despite mixed earnings reports. We recently the iShares US Financial Services ETF (NYSE:)which is down 8.7% so far in the year.

Today’s article features two other ETFs for broad exposure to financial stocks. However, we must remind readers that the outlook for banks could also change if they were to flatten. Therefore, additional due diligence would be appropriate before loading on financial stocks.

1. SPDR S&P Bank ETFs

  • Current price: $51.07
  • 52 week range: $46.86 – $60.60
  • Dividend yield: 2.43%
  • Spending rate: 0.35% per year

the SPDR® S&P® Bank ETFs (NYSE:) invests in a wide range of financial stocks. The fund began trading in November 2005.

KBE Weekly Chart

KBE, which has 100 stocks, tracks the returns of the S&P Banks Select Industry Index, an equally weighted index. When it comes to subsectors, we see Regional Banks (77.72%), Savings and Mortgage Finance (13.38%), and Diversified Banks (6.09%), among others.

The top 10 stocks in the portfolio represent nearly 13% of the $2.67 billion in net assets. Among these names are Financial Jackson (NYSE:), Financial Voya (NYSE:), Northern Trust (NASDAQ:), AXA Equitable Holdings (NYSE:)and Essent Group (NYSE:).

The KBE hit a multi-year high in early January. However, the ETF is down 6.4% year-to-date. Rear P/E and P/B ratios are 10.28x and 1.17x. Readers expecting the negative pressure on financials to ease might consider buying the dips.

2. First Trust Financials AlphaDEX Funds

  • Current price: $45.39
  • 52 week range: $41.13-$48.99
  • Dividend yield: 1.98%
  • Spending rate: 0.61% per year

Our next pick for today is the First Trust Financials AlphaDEX® Funds (NYSE:). It invests in financial stocks based on several growth and value factors. The fund started trading in May 2007 and the net assets amount to 1.4 billion.

FXO Weekly Chart

FXO, which tracks the StrataQuant® Financials Index, has 100 holdings. Stocks in investment banks and brokerage services make up about a third of the fund. Next come non-life insurance (29.33%); banks (21.80%); financial and credit services (7.23%).

Almost a fifth of the portfolio is held in the top 10 stocks. LPL Financial (NASDAQ:), Cincinnati Financial (NASDAQ:); Raymond James Financial (NYSE:)and Alleghenia (NYSE:) are among those names.

We think FXO deserves your attention. The ETF is down around 1.9% so far in 2022, but still up 4.8% over the past 12 months. Like the KBE fund, FXO has also been under pressure since mid-January. Rear P/E and P/B ratios are 8.42x and 1.33x.