Why is it important?

The XLF offers an extremely liquid exposure to the heavyweights in the US financials segment. Its cap-weighted S&P 500-only portfolio means that the fund is concentrated in large banks and other financial institutions, and avoids small-cap stocks. The Banking services account for 50% of the XLF, followed by Insurance (32%) & Investment Banking (18%).

Furthermore, the XLF is large and massively liquid, by far outpacing its peers in trading volume and at the same time it offers a package of very low costs related to it. In fact, for many investors and traders the XLF is by far the most preferred ETF for financial exposure.

As we have stated in our previous analyses, trading with ETFs could be a very profitable business especially for retail investors who lack the required experience and knowledge to do the analysis themselves. In other words, instead of having to choose individual companies and analyzing them, retail traders and investors could pick up an ETF where the professionals running the ETF would be analyzing the stocks for them and picking the stocks that are expected to perform well over a period of time (short or longer term).

We at Dow Experts provide our followers with an in-depth analysis about the most attractive trading opportunities out there and combine fundamental and technical factors that play a key role in all our overall analysis that give a chance to our traders to take advantage of and make high profits on the market by following our professional guidance and analysis.

Going back to our previous point about why the financial sector in the US has been attractive lately, we need to mention the very important factor – interest rates. All banks and financial institutions are very much dependent on whether interest rates are going up or down. In fact, when interest rates go up, financial institutions make more money. Why is that? Well, because the main source of revenue for banks and other institutions are their lending activities. In other words, banks make money out of the difference between the interest they get from their lending activities (loans and credits), and the interest they pay to the customers who made a deposit with the bank.

Thus, when the Federal Reserve (FED) raises interest rates the banks are given an opportunity to increase the spread (the difference) on the interest between loans and deposits; and that way they are able to generate higher revenues and of course higher profits for their shareholders.

The XLF has done a great job since the end of 2016. There were two key reasons for that to happen. The first one is that the whole US economy has done a great job since then. It kept on growing and creating more jobs; while the unemployment rate has gone down to only 3.5% and is currently standing at record lows. Yet, the main reason for the huge growth of the financial sector in particular was the fact that the Federal Reserve started raising interest rates in 2017 and boosting banks and other financial institutions’ stocks. The interest rate was 0.5% in 2016 and the FED started hiking rates by 0.25%. So, since 2017 the interest rates have grown from 0.5% to 2.5% in 2019, which has been extremely beneficial and profitable for the financial sector.

Therefore, traders following our previous analyses on the leading stocks within the financial sector have been generating high profits during that period of time.

Furthermore, the XLF is an extremely important ETF that should be followed by traders and investors for another very important reason. The financial sector plays a key role for the overall performance of an economy. The situation around interest rates is vital for an economy because when interest rates are low banks lend more money and therefore business get more loans that they invest in new projects afterwards and that helps the economy grow and creates more jobs, building people’s wealth.
When interest rates are high, it becomes more expensive for businesses and individuals to borrow money and that could be a key reason for an economy to start slowing down. That being said, together with the strong economic situation in the US we have been seeing lately, we believe the financial sector will keep on rising at least in the short to middle term and lots of profits would be made to the upside on the major banking stocks out there.


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