Banking on Financials

02/06/2015 9:00 am EST

Focus: ETFs

Benjamin Shepherd

Analyst, Breakthrough Tech Profits, Global Income Edge and Personal Finance

Despite being one of the fastest earnings growers of late, the financials sector is getting little love from investors, observes Benjamin Shepherd, editor of Personal Finance.

A study earlier this year by a group of community banks found that 78% of Americans blame big banks for the recession and two-thirds of us are still angry about it.

I don’t think that’s any great revelation, and if you aren’t likely to do business with a big bank, you aren’t likely to invest in it either.

Thankfully, though, our IDEAL stock ranking system holds no grudges and takes the emotion out of buying decision for us. It clearly shows that financials are turning in some of the best earnings and dividend growth of any sector, even as they are undervalued.

While the Fed is being coy about when it will start tweaking interest rates upward, it’s still generally expected to make a move sometime this year. When that occurs, net interest margins at banks, a measure of how much they earn over what they pay for funds, are expected to widen and make them more profitable.

Given the high IDEAL rating the financials sector is currently getting, we’re adding T. Rowe Price Financial Services (PRISX) to our Fund Portfolio.

The fund holds a basket of about 80 financials. While banks are the fund’s single largest allocation, at 38.8% of assets, capital markets companies make up 29.8% of the portfolio, followed by insurers at 18.1%, diversified financials at 8.1%, and real estate-related firms at 3.4%.

That ability to diversify is part of why T. Rowe Price Financial Services is consistently one of the top performing financials sector funds, ranking in the top third of its category on a one-year, five-year, and 10-year basis.

It’s in the top 6% of its peer group on a three-year basis, returning 26.6% in that period. It is also less volatile, with a beta of 0.89 compared with 0.92 for the average financials fund.

With stronger returns than average and an extremely low 0.88% expense ratio, it’s a terrific option as steady economic growth drives demand for financial products and services even as higher rates will make them more profitable. 

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