Powell Prompted Inflows To Financial Services ETFs

March 06, 2018: 11:34 AM ET

New Federal Reserve Chairman Jerome Powell testified before Congress last week, stoking speculation the central bank could raise interest rates as many as four times this year.

Some market participants used Powell's comments as a reason to funnel cash to exchange-traded funds tracking financial services stocks. For example, the Vanguard Financials ETF (NYSE: VFH), the second-largest ETF tracking the sector, saw inflows of $237.1 million for the week ended March 2.

VFH “saw $235 million in inflows last week -- the most received in any single week on record for the fund -- as Powell spoke about the strength of the U.S. economy and the outlook for inflation,” reports Bloomberg. “His comments raised the possibility that the Fed could speed up its timeline for three interest rate hikes this year, or even add a fourth to the mix. And finance firms are one part of the market that could get a boost from that.”

Financial services stocks and ETFs are often popular destinations for investors following Fed commentary that indicates higher rates are on the horizon.

VFH is one of the least expensive financial services ETFs with an annual fee of just 0.10 percent, or $10 on a $10,000 investment. The ETF holds 408 stocks, including significant exposure to JPMorgan Chase & Co. (NYSE: JPM), Bank of America Corp. (NYSE: BAC) and Wells Fargo & Co. (NYSE: WFC). Nearly 47 percent of the ETF's roster is allocated to diversified and regional banks.

VFH's primary rival, the Financial Select Sector SPDR (NYSE: XLF), took in over $154.4 million last week. XLF, the largest financial services ETF, allocates a combined 27.7 percent of its weight to JPMorgan, Bank of America and Wells Fargo. Of the 10 largest U.S.-listed financial services ETFs, only XLF has lost money this year, according to Bloomberg data.

Market observers believing VFH is gathering more assets than XLF because of the former's lower fee, may be right. Sort of. The least expensive financial services ETF in the U.S. is the Fidelity MSCI Financials Index ETF (NYSE: FNCL), which charges 0.084 percent per year, or $8.40 on a $10,000 investment. Boston-based Fidelity has the cheapest sector ETFs in the U.S.

Investors have added $365 million to FNCL this year, well below the $665.7 million added to VFH. The two ETFs have offered nearly identical returns over the past year, each rising 15 percent.

Disclosure: The author owns shares of XLF.

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