This sector ETF briefly beat Big Tech and is up 32% this year. Is it still a buy?

MW This sector ETF briefly beat Big Tech and is up 32% this year. Is it still a buy?

By Isabel Wang

Hello! This is MarketWatch reporter Isabel Wang, bringing you this week's ETF Wrap. In this edition, we look at the Financial Select Sector SPDR Fund, which briefly took the crown as the top performer among its sector peers in 2024. We also explore whether the momentum in the financial sector will carry into next year.

Please send tips or feedback to isabel.wang@marketwatch.com or to christine.idzelis@marketwatch.com. You can also follow me on X at @Isabelxwang and find Christine at @CIdzelis.

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One exchange-traded fund tracking the financial sector has quietly churned out significant returns this year, making it one of the top-performing sector fund as 2024 comes to a close.

The Financial Select Sector SPDR Fund XLF is the second-best performer among the 11 SPDR sector ETFs this year, up nearly 32% so far in 2024. With nearly $50 billion in assets under management, the fund is designed to mirror the performance of the financial sector XX:SP500.40 within the S&P 500, encompassing a wide array of companies in financial services, insurance, banking, capital markets and consumer finance.

XLF in November briefly held 2024's top spot among all the other SPDR sector ETFs, according to Dow Jones Market Data. The fund has also outperformed the broader S&P 500 index SPX this year - which has popped 27.2% - and eclipsed the tech-heavy Technology Select Sector SPDR Fund XLK and the Consumer Discretionary Select Sector SPDR Fund XLY in the same period, according to FactSet data.

"What's been helping financial stocks to rally is the fact that people feel that economic conditions are going to be better, and with Trump coming in, you probably have deregulation and more capital-market activities such as M&A and IPOs. And then you bake that in with the fact that we may have another interest-rate cut next week, and the yield curve has now been uninverted - these are all positive for that sector," said Larry Adam, chief investment officer at Raymond James.

Financial-market investors are betting that Trump's second term could strengthen the U.S. economy and corporate America by adopting a "pro-growth" playbook. The former and now future president has long pushed for scaling back regulations in the financial industry, which would help drive loan growth and investment-banking revenues for some of the country's largest banks.

See: Traders aren't taking Trump's tariff threats seriously. This Wall Street bank says they should.

But does it signal an all-clear for financial stocks in 2025?

Callie Cox, chief market strategist at Ritholtz Wealth Management, said financial stocks are more vulnerable to negative headlines around policy.

"Yes, they benefited off the back of deregulation talk, but if that conversation goes the other way, some of the air could come out of banks," Cox told MarketWatch via phone. "High flyers tend to get hit the hardest when markets pullback."

Adam and his team at Raymond James remained "neutral" on the financial sector due to its relatively modest projected earnings growth in 2025.

Stocks in the S&P 500's financial sector are expected to grow their earnings at a pace of 8.4% in 2025, compared with 14.8% for the broader S&P 500 and 22.6% for the information-technology sector XX:SP500.45, according to FactSet data.

"I want to be in the sectors that have the best earnings growth in 2025 such as tech, healthcare and industrials. Financial stocks may have a slightly below-market type of earnings growth, so we're shying away from that," Adam told MarketWatch in a phone interview on Wednesday.

Sub-sectors have outperformed XLF

Ankit Ullal, head of ETF research and analytics at CFRA Research, said ETFs tracking some subsectors within the financial sector may offer opportunities for investors seeking more pure-play exposure to financial-related equities.

For example, the iShares U.S. Broker-Dealers & Securities Exchanges ETF IAI - which tracks shares of securities and commodities exchanges such as CME Group Inc. $(CME)$, Nasdaq Inc. $(NDAQ)$ and MSCI Inc. (MSCI) - has risen 12% since Election Day, compared with the 6.4% advance for XLF in the same period. For the year, IAI has risen over 39%, while XLF is up 32%, according to FactSet data.

Also, the SPDR S&P Regional Banking ETF KRE has popped over 10% since Nov. 5, while the Invesco KBW Bank ETF KBWB is up 9.2% and the SPDR S&P Bank ETF KBE has gained nearly 9% in the same period, according to FactSet data.

"The gain for XLF since Nov. 5 is not bad, but it's lower than these other specialized segments partly because it also holds things like Berkshire Hathaway $(BRK.B)$ $(BRK.A)$ as well as financial-services firms such as Visa (V) (V) and MasterCard $(MA)$ that haven't moved as much as these other segments," Ullal noted.

As usual, here's your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good...

   Top performers                                                                                                                                                                      %Performance 
   YieldMax TSLA Option Income Strategy ETF                                                                                                                                            10.1 
   United States Natural Gas Fund LP                                                                                                                                                   9.3 
   YieldMax MSTR Option Income Strategy ETF                                                                                                                                            6.8 
   Roundhill Magnificent Seven ETF                                                                                                                                                     5.4 
   Amplify Junior Silver Miners ETF                                                                                                                                                    4.8 
   Source: FactSet data through Wednesday, Dec. 11. Start date Dec. 5. Excludes ETNs and leveraged products. Includes NYSE-, Nasdaq- and Cboe-traded ETFs of $500 million or greater. 

... and the bad

   Bottom performers                                    %Performance 
   AdvisorShares Pure US Cannabis ETF                   -8.9 
   iShares U.S. Insurance ETF                           -4.6 
   SPDR S&P Insurance ETF                               -4.1 
   PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF   -4.0 
   iShares U.S. Healthcare Providers ETF                -3.8 
   Source: FactSet data 

New ETFs

-- Invesco on Thursday announced the launch of the Invesco MSCI North America Climate ETF KLMN, which seeks to track the MSCI Global Climate 500 North America Selection Index. The fund broke a record by surpassing the funding for any previous new ETF launch globally - with $2.4 billion in assets from Finnish pension insurer Varma, the company said in a press release.

-- Direxion on Wednesday announced two additional pairs of single-stock leveraged and inverse ETFs with exposure to the daily performance of the common stock of Berkshire Hathaway Inc. or Palantir Technologies Inc. PLTR - through either the Direxion Daily BRKB Bull 2X Shares BRKU and Direxion Daily BRKB Bear 1X Shares BRKD, or the Direxion Daily PLTR Bull 2X Shares PLTU and Direxion Daily PLTR Bear 1X Shares PLTD.

Weekly ETF Reads

-- Why Cathie Wood may have the best fund to play Trump 2.0 (MarketWatch)

-- Taiwanese Investors' $29 Billion Bond ETF Rush Stirs Waves in Currency, Treasury Market (Bloomberg)

-- Levered China ETF Bullish Bets Net $138 Million Paper Gain (Bloomberg)

-- US investors have saved $250bn by investing in ETFs, says BofA (Financial Times)

-- Should Investors Avoid Active Funds? (MorningStar)

-Isabel Wang

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December 12, 2024 17:53 ET (22:53 GMT)

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