Monday, June 10, 2013

Two hot areas in 2013 that have not caught much of Quant’s affection have been Japan and financials.  The former has proven beneficial but financials have continued to outperform the S&P 500.  The Big Daddy financial ETF, the SPDR Financial Select Sector Fund (XLF), has begun to score better in June and is at 8th place to start this week.  Some of its outperformance stems from its 8.55% weighting in Berkshire Hathaway and its insurance positions but having almost 30% in the big four US banks hasn’t hurt performance either.

There has been some recent press about the quality of bank earnings and while we have seen XLF’s P/E score rise as the ratio has come down, its other fundamental sub scores have not risen as much.  Its overall Fundamental Score of 65.4 is good enough to get it in the top 10 today because its Behavioral Score is a very solid 81.1.  All three technical sub categories show strength over the short, intermediate and long term at close to 80 for each and the three sentiment sub categories are similarly strong led by a 99.8 short interest score.  Its substantial size, liquidity and sponsor combine for an 80.3 Quality Score but the financial sector is not Quant’s favorite, leading to a middling 49.1 Global Theme Score. Those latter two categories do not get factored into its 8.11 Green Diamond Reward Rating because some of their components are part of the ETFGsm risk model.  Even considering 2008, XLF gets a low 2.16 Red Diamond Risk Rating, which is more a reflection of its gradual and steady recovery over the last four years.

XLF’s 83 constituents are not all banks and insurance companies as brokers, REITs and consumer finance make up another 30% of AUM with other colorful slices of its pie charts too.  We’ll let the analysts and columnists debate earnings quality and when the Fed will turn the tables on these companies but nobody thinks Bernanke is going to send the industries he oversees into cold turkey withdrawal spasms.  It may be too easy, but like the late Marty Zweig used to say, “Don’t fight the Fed”.  Quant is finally dipping its cup into the punchbowl suggesting XLF will continue to outperform over coming months.  Thanks for checking in with ETF Globalsm this morning and good luck this week.

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