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Established on Dec. 16, 1998, the Financial Select Sector SPDR Fund (XLF) aims to provide investment results similar to the performance of the S&P Financial Select Sector Index by allocating its holdings similar to the index’s holdings.
XLF aims to track the financial sector and allocates its fund in the banking, insurance, real estate investment trust (REIT), capital markets, diversified financial services, consumer finance, real estate management and development, and thrifts and mortgage finance industries.
As of April 1, 2021, the Financial Select Sector SPDR Fund’s top 10 holdings were Berkshire Hathaway Incorporated Class B (BRK.B), JPMorgan Chase & Company (JPM), Bank of America Corporation (BAC), Wells Fargo & Company (WFC), Citigroup Incorporated (C), Morgan Stanley (MS), Goldman Sachs Group Incorporated (GS), BlackRock Inc. (BLK), Charles Schwab Corporation (SCHW), and American Express Company (AXP).
Characteristics
The Financial Select Sector SPDR ETF is an open-end investment company, which is managed by State Street Global Advisors Funds Management Incorporated. XLF is listed on the New York Stock Exchange Arca Exchange. As of April 7, 2021, the average daily trading volume of XLF over the past 65 days was 64 million. The high liquidity and the depth of its fund allow for a tight bid-ask spread.
The Financial Select Sector SPDR Fund’s gross expense ratio of 0.12% is low, relative to other ETFs that track the financial sector. State Street Global Advisors is able to maintain that low expense ratio because it engages in securities lending.
Suitability and Recommendations
Investing in the Financial Select Sector SPDR Fund requires a high risk tolerance. As of July 8, 2015, the average volatility over the past five years of XLF was 16.55%. When compared to the SPDR S&P 500 ETF Trust (SPY), the standard deviation of XLF was 40.16% greater than the SPY’s standard deviation over the same period. The financial sector is exposed to a plethora of risks, such as market risk, currency risk, interest rate risk, and macroeconomic risk. Investors and potential investors should follow the worldwide economic condition and keep in mind any economic data that could affect financial companies.
As of March 31, 2021, XLF had a trailing five-year alpha of 0.59, beta of 1.21, R-squared value of 71.11, standard deviation of 20.80%, and a return of 15.53%. When compared to the MSCI ACWI USD Index, XLF experienced more volatility than the index. However, investors were compensated with a return of 15.53%, while the MSCI ACWI Index had a return of 13.21%. With an alpha of 0.59, the XLF outperformed the index by 0.59%.
In that same period, the Financial Select Sector SPDR Fund had a Sharpe ratio of 0.75, while the MSCI ACWI USD index had a Sharpe ratio of 0.86. Therefore, investors were not adequately compensated for the amount of risk they assumed when investing in this fund.
The United States’ continued economic recovery in 2015 may cause the Federal Reserve Board to take a hawkish view on the economy. With improving housing, employment, and retail sales data, the likelihood of an interest rate hike is high. This would be beneficial to financial firms, which could see an increase in profitability. Banks could earn more from the spread of interest rates in different asset classes.
The Financial Select Sector SPDR Fund has a comprehensive portfolio with 65 holdings, which aids in mitigating company risks. The ETF is best suited for investors who are willing to take on an above-average level of risk and pursue overweight exposure to the U.S. financial services industry while potentially benefiting from rising interest rates.