Financial markets in many ways work as voting instruments for the masses to determine which areas will provide economic value over time. In that sense, investors are constantly on the lookout for companies which are expected to be embraced by all over a specific time frame, holding all else equal.
With interest rates on the rise, financial stocks have been put in focus by many investors. Rising interest rates generally provide increased profitability for banks, allowing for higher profitability and distributions from large financial players in such an economy. A number of exchange traded funds (ETFs) such as the Financial Select Sector SPDR ETF (NYSE:XLF) have seen cash inflows increase substantially of late as investors continue to pile into financials in a big way.
Certainly, from a valuation perspective, most of the core holdings of funds such as the Financial Select Sector SPDR ETF represent excellent value relative to other sectors which are negatively correlated to rising interest rates, making the rise in interest for such ETFs understandable. The time and effort necessary to effectively pick and choose the financials stocks which will outperform their sector can be onerous, and in that regard, choosing an ETF such as the aforementioned SPDR fund is an excellent way to go for passive investors.
I expect interest rates to continue to rise, as do most pundits, and would encourage investors to continue to look at investing in defensive baskets of stocks in sectors such as financials at this point in time.
Invest wisely, my friends.
