24th February 2024

Better business. Better community

Business Industry and Financial

A Financial Services ETF Worth Scooping Up on the Cheap?

The notion of “summertime blues” is what we could be looking at in financial markets this year. But when it comes to investing, a short-lived storm might be the perfect time to invest, especially when a market sector is expected to rebound. Consider iShares U.S. Financial Services ETF (IYG) as a bargain play, writes Jim Woods, editor of The Deep Woods.

We’ve already seen the chatter go from “sell in May and go away,” to “sell now and go away.” And while selling now might be a strategy that serves some well, particularly if you’ve been in tech stocks in 2023, the better approach in my view is to let the data decide.

The current situation for markets is that regional banks have stabilized, there continues to be “dovish” Fed policy expectations, still-elevated inflation, mild deterioration in the labor market and slowing growth. The current market environment largely reflects the divide between what the market thinks/wants to happen (stable banks and less-hawkish Fed) and what is actually happening (inflation sticky, growth slowing).

For things to improve from the current situation, i.e., the so-called “better-if” scenario, we would need to see regional bank stress continue to subside and/or disappear. We also need the Fed to confirm dovish expectations, core CPI needs to drop towards 5.0%, the labor market must deteriorate and economic growth needs to gradually moderate.

For things to descend into the summertime blues, i.e. the “worse-if” scenario, regional bank risks need to re-emerge, the Fed hikes rates by 25 basis points in May and signals more hikes are coming, Core CPI stays sticky, or worse, disinflation reverses and the labor market and economic growth remain resilient.

As for the current banking crisis, it’s still ongoing. But like any storm, this one will assuredly not last forever. That’s where IYG comes in. Established in 2000 by Blackrock, the ETF invests in a market-cap-weighted subset of U.S. stocks that consists entirely of financial service firms.

All of the stocks IYG is composed of come from the Dow Jones U.S. Financial Services Index, featuring a broad spectrum of financial services, including the bank, asset management, consumer finance, specialty finance, investments service and mortgage finance industries. IYG’s index is reconstituted annually and is subject to quarterly reviews.

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Like many assets in the financial sector, IYG has had lackluster performance of late, with minimal returns. As of April 12, IYG is down 2.32% in the last month, 9.22% in the past three months and 4.80% for the year to date (YTD).

However, the fund has a relatively inexpensive expense ratio of only 0.39%. With the finance sector likely to rebound when the banking crisis finally recedes, getting in while prices are low might prove to be a fruitful investment.

Recommended Action: Consider buying IYG.

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