Financial Services Sector Snapshot

Over the past 12 months, the financial services sector has outperformed the broader market, as evidenced by the Financials Select Sector SPDR (XLF). As one of the 11 Select Sector SPDR ETFs, the fund tracks the performance of the sector.

The Select Sector SPDR ETFs encompass all the constituents of the S&P 500. As some of the oldest and largest sector ETFs available, they share key features such as low expense ratios of 0.09%, excellent liquidity, and market-cap-weighted structures.

Honing in on the Financials Select Sector SPDR ETF, it stands out as one of the largest ETFs, with a market value just above $40 billion—significantly above the $17.5 billion median across other sectors.

XLF is also one of the most diversified Sector ETFs, holding 71 stocks, with its top holding accounting for 13% of the fund (compared to a median of 14% among the other sectors). The ETF's top 10 holdings make up 54% of the fund (vs. a 65% median). XLF offers a dividend yield of 1.6%, aligned with the median from all sectors.

A look inside 

XLF is spread out across five sub-sectors:  

• Financial Services (31%)

• Banks (25%)

• Capital Markets (23%)

• Insurance (17%)

• Consumer Finance (4%) 

Top 10 XLF Holdings

Outperforming the market 

The XLF fund has outperformed the S&P 500 by 3.5% over the last twelve months. This performance has largely been driven by robust consumer spending, increased credit card usage, and higher interest rates. These higher interest rates have helped banks as they benefit from a net interest margin, the difference between the interest rate the banks earn from investing and the interest rates they pay out to customers. 

XLF Performance Versus S&P 500

Key risks

However, these driving factors are expected to weaken in the near future, and there are a few data-driven trends that can offer insight. Although increased credit card transactions and balances boost bank profits, the surge in delinquencies poses a significant concern. US delinquency rates on credit card loans—representing overdue debt—have reached alarming levels. In April of this year, delinquency rates exceeded 3%, marking the highest level since 2012.

Delinquency Rate on Credit Card Loans, All US Commercial Banks

The US personal savings rate is another risk factor for the financial sector. Higher savings rates typically lead to greater inflows for banks, enhancing their investment capacity. Unfortunately, the current US personal savings rate—just 3.4% of disposable personal income—is one of the lowest recorded since 1960.

While a recession has been avoided so far, this low savings rate leaves Americans with little financial cushion in the event of an economic downturn. Without sufficient savings, those who face unemployment are more likely to default on loans, increasing the risk of delinquencies for banks.

US Personal Savings Rate

Some tailwinds

Despite the anticipated challenges, the top holdings in XLF have taken robust defensive measures to navigate these risks. 

Berkshire Hathaway (BRK), XLF’s largest holding, has maintained a substantial cash position to weather potential financial storms. Earlier this year, Warren Buffett expressed confidence in Berkshire's ability to withstand financial disasters of unprecedented scale. In Q1, Berkshire's total cash and short-term investments surged to nearly $189 billion—a 44% increase from Q1 2023.

Meanwhile, JPMorgan (JPM), the fund’s second-largest holding, has bolstered its defenses by setting aside a $3.05 billion provision for credit losses, surpassing the estimated $2.78 billion in expected losses.