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Jan 7, 2019

Worst-hit ETFs of 2018 revive as investors flock to financials funds

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Financials are back in vogue and so are the exchange-traded funds that own them.

The US$24 billion Financial Select Sector SPDR Fund, or XLF, took in US$974 million one day last week, the largest inflow since the month U.S. President Donald Trump was elected in 2016. It’s a sharp reversal from last year when investors yanked US$8.9 billion from U.S.-listed ETFs tracking financial companies -- more than from any other sector.

With looming uncertainty about the U.S. economy, value stocks like financials are attractive again as investors seek to diversify their bets on growth. And thanks to last year’s sell-off, their price looks pretty good too: At near 10 times forward earnings, the financial sector is trading at valuations not seen since 2012.

“Value is just going to be more of a magnet to buyers in 2019,” said Jeanie Wyatt, founder and chief investment officer of South Texas Money Management, which manages US$3.8 billion. “We like the financials space pretty much in general right now,” she said, adding that she’s looking for reasonable valuations and for stocks with “good dividend support.”

In December, financials were the second-worst performing among the 11 sectors in the S&P 500 index, falling 11 per cent amid pressures ranging from disappointing loan growth to a flattening yield curve. XLF plunged 15 per cent in 2018, the most since 2011 and the first year of declines for the fund since 2015. This year, financials ETFs have absorbed US$512 million, more than any other sector.

The renewed interest in financials this month after last year’s sell-off could be part of a capitulation trade, since these companies are trading at a significant discount to utilities, another defensive play, according to David Sowerby, managing director and portfolio manager at Ancora, which manages US$6.9 billion.

“The sectors and the stocks that were hit the hardest come back the best,” said Sowerby. “The valuation on financials today is much more compelling relative to their dividend yield as well as their dividend growth.”