XLF Financial Select Sector SPDR ETF

Investment Thesis As the market begins to show signs of recovery, it is an ideal time to invest in what is currently one of the most undervalued sectors: financials—specifically US banks. While most sectors are currently down 4-6%, the financials sector remains down over 10%. The Financials sector remains strong and many analysts agree that it is undervalued.

History XLF was created in 1998 and suffered gravely in the financial crisis of XLF has been steadily recovering since the financial crisis and the last few months have been its worst since then. “Unlike many other U.S. equity sectors, the financial-services sector has not returned to its pre-crisis highs. The reasons for this have been well documented, including greater regulation, continued ultralow interest rates, asset write-downs, and higher capital requirements.” – morningstar.com

Fundamentals The Financial Select Sector SPDR Fund, before expenses, seeks to closely match the returns and characteristics of the S&P Financial Select Sector Index. In seeking to track the performance of the index, the fund employs a replication strategy. It generally invests substantially all, but at least 95%, of its total assets in the securities comprising the index. The index includes companies from the following industries: diversified financial services; insurance; commercial banks; capital markets; REITs; consumer finance; thrifts & mortgage finance; and real estate management & development. The fund is non-diversified.

Performance

Year to Date

5 Year

10 Year

YTP Compared to S&P 500

Industry News

Interest Rates Multiple sources agree that fed will likely raise interest, rates at least, two times this year, most likely starting in the 3 rd quarter. The interest rate should rise slowly at about.25% every raise, and is predicted to grow into the next couple of years. This increase to an interest rate of about one percent by the end of 2016 will improve bank profitability. Which should lead to an increase in the ETF’S price.

Oil Concerns?

Competition Financials ETFs are very similar and very common. iShares, Guggenheim, and others offer financials ETFs with similar holdings. XLF is consistently ranked among the top financials ETFs. Other Highly Ranked Financials ETFs: IYG (iShares) RYF (Guggenheim) PGF (PowerShares)

Bear, Base, and Bull Case

Bear Deflationary pressures as a result of weak china and an oversupply in oil paired with the appreciation of the strong dollar will keep the fed from further increasing rates for a longer period of time which will keep financials low. As a result XLF will continue at the current price ($22.04) or, in the worst case, fall to previous lows ($19.00)

Base The market continues to recover slowly and XLF returns to its 2015 high of $25.62.

Bull The market fully recovers and begins to slowly grow again. The Fed enacts continued hikes in interest rates, and the banks continue to cut operation costs while increasing profits. Under these conditions XLF will reach new highs and continue its steady climb back to pre-crisis highs. Potentially reaching past $27.00

Average Forecasts for Top 5 Bear: 7.64% increase Base: 26.5% increase Bull: 42.04% increase These forecasts come from CNNMoney.com’s average forecasts for each of the top 5 companies.