VFH: Top Holdings Remain Resilient, But Consumer Risks Are Rising

seekingalpha07-22

VFH warrants a hold rating due to the resiliency of top holdings despite rising consumer risk factors such as increasing credit card delinquencies and decreasing savings rates.VFH is a passively ...

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22:39 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4705490-vfh-etf-top-holdings-remain-resilient-consumer-risks-rising><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>VFH warrants a hold rating due to the resiliency of top holdings despite rising consumer risk factors such as increasing credit card delinquencies and decreasing savings rates.VFH is a passively ...</p>\n\n<a href=\"https://seekingalpha.com/article/4705490-vfh-etf-top-holdings-remain-resilient-consumer-risks-rising\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0648001328.SGD","symbol_name":"Natixis Harris Associates US Equity RA 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ACC"},"translate_title":"VFH：顶级持股仍具有弹性，但消费者风险正在上升","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"XLF":1,"VFH":1,"MA":1,"IYF":1,"FNCL":1,"US5Y.BOND":0.9,"US10Y.BOND":0.9,"US12M.BOND":0.9,"US2Y.BOND":0.9,"US30Y.BOND":0.9,"US3Y.BOND":0.9,"US6M.BOND":0.9,"US7Y.BOND":0.9,"BRK.A":0.9,"BAC":0.7,"JPM":0.7,"BRK.B":0.7,"V":0.7,"FDN":0.69,"US912797HE00.BOND":0.6,"US912797GW17.BOND":0.6,"US912797GL51.BOND":0.6,"US912797GK78.BOND":0.6,"LU":0.6},"content_text":"VFH warrants a hold rating due to the resiliency of top holdings despite rising consumer risk factors such as increasing credit card delinquencies and decreasing savings rates.VFH is a passively managed ETF that has outperformed the market since my coverage last fall due to strong consumer spending, credit card usage, and elevated interest rates.VFH has a competitive expense ratio, the highest dividend yield, and high diversification compared to top peer financial sector ETFs.   Dragon Claws/iStock via Getty ImagesInvestment Thesis Vanguard Financials ETF (NYSEARCA:VFH) warrants a hold rating due to the resiliency of its top-weighted holdings despite a rise in several consumer risk factors. The fund has recently provided better-than-market returns because of strong consumer spending, credit card usage, and elevated interest rates. However, these factors are likely to weaken in the short term. Despite this weakening, the top holdings for VFH have taken strong defensive positions to survive these risk factors. Finally, compared to peer financial sector ETFs, VFH has a competitive expense ratio, the highest dividend yield, and a high amount of diversification. Fund Overview and Peer Comparison VFH is a passively managed exchange-traded fund that seeks to track the Sliced U.S. Investable Market Financials 25/50 Index. I covered the fund in November last year and rated the fund a hold. For comparison purposes, other funds examined are iShares U.S. Financials ETF (IYF), Fidelity MSCI Financials Index ETF (FNCL), and Financial Select Sector SPDR Fund (XLF). Since my last article on VFH, the fund has returned 22.6%, beating the S&P 500 Index’s 20.86% since last November. Despite increasing risk factors for the financial sector since then, I reiterate a hold rating for reasons discussed in this article.   One-Year Price Return: VFH and Top Compared Financials ETFs (Seeking Alpha)VFH has seen a 10-year CAGR of 10.29%. Therefore, the fund has outperformed FNCL, but underperformed XLF and IYF over the past decade. VFH has the highest dividend yield of peers at 1.82%. With an expense ratio at 0.10%, the fund is more affordable than IYF’s 0.40%, but more expensive than FNCL and XLF with expense ratios of 0.08% and 0.09%, respectively. VFH ties FNCL for the greatest diversification with 405 holdings. Fund Holdings and Key Outlook Updates Since last November, JPMorgan (JPM) has moved up to VFH’s top holding with a gain from 7.8% to 8.8% weight. Berkshire Hathaway (BRK.B), Mastercard (MA), and Visa (V) all have reduced weights since last fall. Bank of America (BAC) also has increased weight. Each compared fund is also heaviest on JPM and BRK.B among many other similarities.   VFH Top 10 Holdings by Weight (Vanguard)There are multiple reasons why VFH performed better than the market since last fall. Looking forward, however, there are several consumer risk factors to consider. Despite these risks, VFH’s top companies have prepared conservatively, ensuring that they can withstand a downturn. These factors are discussed in further detail below. Why VFH Has Performed Better Than Expected As discussed earlier, VFH has performed strongly since my previous coverage last fall. There are a few reasons for this performance and indications as to whether this will persist looking forward. The first reason why VFH’s top holdings have seen a strong nine months is that the U.S. Federal Reserve has maintained relatively high interest rates. These higher interest rates have helped banks as they have benefited from a net interest margin. This is the difference between the interest rate the banks earns from investing and the interest rates is pays to customers. For example, Bank of America pays out an average savings account interest rate of just 0.01%, despite earning a significantly higher rate itself. The second reason why VFH’s top holdings have seen strong returns is their preparation for a recession. In early 2023, many economists predicted an economic recession sometime in 2023. One economist predicted two quarters of negative GDP in 2023 and unemployment to peak at 5.6%. As a result, banks like JPMorgan braced for tough times. The company built in a $3.05B provision for credit losses, exceeding an estimated $2.78B in credit losses. Therefore, despite the potential risks for increased credit card defaults by the U.S. consumer, JPMorgan benefited from this preparation. Berkshire Hathaway, VFH’s #1 holding back in November and now #2 holding, also demonstrated resiliency. For example, it has a high cash position to weather any upcoming storms. Earlier this year Buffett stated, “I believe Berkshire can handle financials disasters of a magnitude beyond any heretofore experienced.” BRK.B’s Q1 total cash and short-term investments hit nearly $189B, or a 44% increase since 2023 Q1. Additionally, the company’s insurance underwriting hit $5.4B in operating earnings earlier this year, further fueling Berkshire’s position. The final benefit for Warren Buffett’s company is its diverse conglomeration of sub-holdings in energy, IT, consumer discretionary, and other sectors. Looking Forward: How Things Could Change The factors discussed above are admittedly rearward looking. Looking forward, however, there are a few data-driven trends that can offer insight. While credit card transactions and balances help bank profits, the rise in delinquencies is problematic. As we have seen, U.S. delinquency rates on credit card loans have hit a high. In April of this year, it was reported that delinquency rates hit over 3%, the highest on record since 2012.   U.S. Credit Card Delinquency Rate (Federal Reserve Bank of St. Louis, Federal Reserve Board)The U.S. personal savings rate also presents a risk factor for the financial sector. Higher savings rates produce greater inflows for banks and therefore increased capacity for investment. Unfortunately, the U.S. personal savings rate currently stands at just 3.9%, one of the lowest levels seen since 1960. While a recession so far has been avoided, this low savings rate means that there is little cushion for Americans in the event a recession occurs. Without a savings buffer for those who experience unemployment, higher delinquencies are likely to pose a greater risk for banks.   U.S. Consumer Personal Savings Rate, 1960-Present (U.S. Bureau of Economic Analysis)A final key variable impacting both delinquencies and the savings rate is inflation. The below chart shows the 12-month change in consumer price index through May 2024. As depicted, there is a clear trend of inflation easing. Reduced inflation will likely have a two-fold effect on the banking industry. First, interest rates will correspondingly be reduced, thereby reducing the net interest margin for banks. Second, reduced inflation will ideally result in a greater savings rate for consumers along with lower delinquencies. The exact cumulative effect of these factors on earnings for banks is difficult to predict. However, VFH’s top holdings appear to have prepared conservatively for a variety of outcomes.   U.S. YoY Consumer Price Index, May 2023-May 2024 (U.S. Bureau of Labor Statistics)Current Valuation  Given the risk factors just discussed, the next question is whether VFH’s top holdings, and the fund itself, are appropriately valued. VFH’s P/E and P/B ratios back in November 2023 stood at 12.3 and 1.6, respectively. Despite VFH’s strong price return over the past year, it is not evident that its valuation has risen considerably. Compared to overall S&P 500 P/E ratio which is historically high at over 28.5, VFH and peer funds are relatively attractive. Valuation Metrics for VFH and Peer Competitors     VFH IYF FNCL XLF   P/E ratio 16.00 15.79 16.42 16.45   P/B ratio 1.90 1.92 1.98 2.14   Click to enlarge Source: Compiled by Author from Multiple Sources, 21 Jul 24 As depicted above, VFH’s valuation metrics are also more attractive compared to most peer competitors. This is driven predominantly by the P/E and P/B ratios of VFH’s individual holdings. Specifically, the P/E ratios for JPMorgan, BAC, and BRK.B are at 11.71, 15.08, and 12.83 respectively. These reasonable valuations have been bolstered by solid bank earnings. However, as discussed, there are multiple consumer risk factors that could directly impact these earnings looking forward. Risks to Investors In addition to consumer risk factors such as credit card delinquencies and low savings rates, the other primary risk factor is geopolitics. JPMorgan’s CEO, Jamie Dimon, in an interview regarding geopolitical concerns stated that “we haven’t really seen something like this pretty much since World War II.” Regardless of the resiliency and cash positions of JPMorgan, Berkshire Hathaway and others, significant conflict that draws in the United States would likely have major impacts on the financial sector. Arguably, the market is already betting that interest rates will begin dropping this fall and the U.S. Federal Reserve crafts a soft landing while reaching its target inflation rate. Such a scenario may continue to fuel the financial sector in producing market-beating returns. However, the timing of interest rate cuts, a resurgence in inflation, and geopolitics are all key variables that could still upset a soft landing. Concluding Summary  VFH has seen strong performance since last fall driven by bank profitability as a result from higher interest rates, strong cash positions, and high consumer spending rates. Looking forward, there are risk factors for VFH while there are reasons to remain optimistic. Although reduced interest rates are expected and the credit card delinquency rate has been increasing, cash positions for VFH’s top holdings remain strong. VFH also maintains a fair valuation consistent with the earnings of top financial companies. Therefore, while there are increased risk factors for VFH since my coverage last fall, the fund maintains a hold rating due to the resiliency of VFH’s top holdings.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"Business Data","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.26.4","shortVersion":"4.26.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2453999087"}