XLF - FNCL: Nothing Special As A Financials Play
2023-11-10 10:23:02 ET
Summary
- Fidelity® MSCI Financials Index ETF is an exchange-traded fund that provides broad exposure to U.S. financial companies, aiming to replicate the performance of the MSCI USA IMI Financials 25/50 Index.
- The FNCL ETF's portfolio is predominantly made up of financial stocks, with the top 10 holdings making up 43% of the holdings.
- FNCL's top holdings include Berkshire Hathaway, JPMorgan Chase, Visa, Mastercard, and Bank of America.
The financial sector, home to banking institutions, insurance companies, and investment firms, plays a crucial role in the global economy. And there are a large number of exchange-traded funds, or ETFs, out there designed to play the sector. Most candidly roughly perform the same, but some have more name recognition in terms of brand than others. Fidelity and MSCI? Let's combine the two, and look at the Fidelity® MSCI Financials Index ETF ( FNCL ) as a way to gain exposure.
Top Down: Pros vs. Cons
Investing in financial sector stocks now can be advantageous for a multitude of reasons. The financial sector is at the heart of the economy and tends to perform well in a growing economy. Should the Fed be able to pull off a soft landing, financial stocks likely would be poised to benefit from increased lending and investing activities following the meaningful credit contraction that's been on-going since the regional bank crisis in March. Additionally, these stocks often provide attractive dividends, which can be a steady source of income for investors. They also offer opportunities for diversification, as the sector contains a wide range of companies, including banks, insurance companies, and asset managers.
This isn't my base case. Financials are cyclical, meaning they are prone to fluctuations based on the current economic cycle. During a recession, for instance, these stocks can underperform meaningfully. Another considerable risk is loan losses; if the loans given out by banks are not repaid, it can negatively impact the valuation. Interest rate risks also pose a threat as banks are highly sensitive to changes in interest rates, which can affect their profitability. Lastly, the risk of a downturn or reduced corporate profit growth cannot be completely ruled out. Because of this, despite what seems like a sector that is "cheap," it can certainly get a lot cheaper.
What is FNCL?
Now let's bring it down to the investment level. FNCL is an exchange-traded fund that provides broad exposure to U.S. financial companies of all sizes. It aims to replicate, before fees and expenses, the performance of the MSCI USA IMI Financials 25/50 Index, its chosen benchmark index.
FNCL uses a representative sampling indexing strategy. This means that instead of owning every security in the benchmark index, it invests in a smaller but representative sample. These securities are expected to have similar investment characteristics, fundamental characteristics, and liquidity measures as those of the index.
FNCL's portfolio is predominantly made up of financial stocks, with minor appearances from real estate and industrial sectors. It's important to note that the ETF is limited to companies headquartered in the United States. FNCL holds 417 stocks, but the top 10 make up 43% of the holdings. Despite what looks like broad diversification, this is a top heavy fund. That means that a few stocks carry the overall performance, while a greater number of holdings have virtually no impact.
Top 5 Holdings
The top 5 holdings in FNCL's portfolio play a significant role in its performance. These include:
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Berkshire Hathaway Inc. ( BRK.B ) : This multinational conglomerate holding company, led by Warren Buffet, has a diverse portfolio of businesses and investments. It is the top holding in FNCL at 8.42%
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JPMorgan Chase & Co. ( JPM ) : As one of the largest banks in the U.S., JPMorgan Chase has a significant influence on the financial sector. Its strong balance sheet and robust performance make it a notable holding in FNCL at 7.86%.
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Visa Inc. ( V ) : Visa is an international payment technology corporation that facilitates connections between consumers, enterprises, financial institutions, and governing bodies across over 200 countries and territories. It holds a 6.92% weighting.
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Mastercard Inc ( MA ) : Similar to Visa, Mastercard is a leading global payments & technology company that connects consumers, businesses, merchants, issuers & governments around the world. Current weighting at 6.23%.
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Bank of America Corporation ( BAC ) : As one of the largest banking institutions in the U.S., Bank of America provides a wide range of financial products and services. Current weighting is 3.64%.
Household names for sure here.
Peer Comparison
When considering an investment in FNCL, it's useful to compare it with similar ETFs in the market. Some potential alternatives include the Financial Select Sector SPDR Fund ETF ( XLF ) and the Vanguard Financials ETF ( VFH ). While these ETFs also focus on the financial sector, their portfolio composition, performance, and cost may differ. But what doesn't differ very much is overall performance as we can see below.
Conclusion
Overall, in my view there's nothing particularly special about FNCL compared to its competitors, and I'm not certain of the idea of buying heavily into Financials at this point of the cycle where credit is contracting and a recession looms. If you like Fidelity and MSCI, go ahead and choose FNCL. Overall, though, I'd personally pass as there's nothing particularly unique here for broad exposure.
For further details see:
FNCL: Nothing Special As A Financials Play