Sentiment can change quickly in the stock market. A week ago, bank stocks and regional banks, in particular, were reeling in the aftermath of the collapse of Silicon Valley Bank. Now, a flurry of positive news and a spate of deal-making is beginning to create optimism about the sector again. One way to tap into the improving sentiment towards banks and the financial sector, in general, is through a low-cost, dividend-paying ETF like the Vanguard Financials ETF (NYSEARCA:VFH).
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What is VFH ETF?
VFH is a $7.8 billion ETF from mutual fund and ETF giant Vanguard that seeks to track the performance of MSCI US Investable Market Index (IMI)/Financials 25/50.
As is usually the case with the Vanguard family of ETFs, VFH is appealing thanks to its low fees. The expense ratio is just 0.1%, meaning that an investor putting $10,000 into the fund would pay just $10 in fees in year one. These low fees make a big difference when compounded over time. VFH dividend currently yields 2.5%, further adding to its appeal.
Animal Spirits Returning?
A flurry of positive developments looks like it may be bringing animal spirits back to financials. The Bank Term Funding Program is assuaging fears that there will be widespread bank runs. Meanwhile, a consortium of major banks led by JPMorgan Chase and others have teamed up to infuse $30 billion into First Republic Bank in order to shore up its balance sheet and to stop any further contagion from spreading through the sector.
And that’s not all. Shares of New York Community Bank surged by as much as 42% on Monday after its Flagstar Subsidiary agreed to purchase the deposits and a large portion of the loans of Signature Bank at what Wall Street analysts hailed as a favorable deal.
The move led to a wave of analyst upgrades and higher price targets for the bank, indicating that the consensus is moving from maximum fear to the early stages of bullishness for the financial sector. That’s why it could be an opportunistic time for investors to gain exposure to financials with VFH.
VFH Sports 379 Holdings
With 379 holdings, the Vanguard Financials ETF is about as diversified as you can get from a quantity perspective. On the other hand, VFH’s top 10 holdings account for over 40% of the fund, so it may not be quite as diversified as it looks just based on the number of holdings. That said, overall, the diversification here looks sufficient for investors.
In no particular order, major U.S. banks like JPMorgan Chase, Bank of America, Wells Fargo, and Morgan Stanley make up four of the top five holdings, with Warren Buffett’s Berkshire Hathaway occupying the remaining place in the top five.
While banks are obviously a major component of the ETF, there are also many other types of financial companies. A look through VFH’s top 50 holdings shows a wide array of investments, ranging from private equity firms like Blackstone, KKR & Co, and Apollo Global to exchange providers like S&P Global, Nasdaq, Intercontinental Exchange and the CME Group.
Credit card providers like American Express, Discover Financial, and Capital One are well-represented here, as are insurance companies like Chubb and Progressive.
As you can see, while this ETF focuses on financials, it takes a broad-stroke approach and invests across a wide variety of businesses and subsectors. What I like about this is that investors get plenty of the potential upside from a rebound in banking, but they aren’t totally dependent on it.
Below you’ll find an overview of VFH’s top 10 holdings using TipRanks’ ETFs Holdings screener, which gives investors a comprehensive birds-eye view of an ETF’s composition.
Top holdings like JPMorgan, BlackRock, and Charles Schwab all feature TipRanks Smart Scores of 8 or higher, earning an Outperform rating. The Smart Score is TipRank’s proprietary quantitative stock scoring system that evaluates stocks on eight different market factors. The score is data-driven and does not involve any human intervention.
VFH Stock Has Significant Upside Potential
The other good news about VFH is that the analyst community sees plenty of upside potential here. While it has a Hold consensus rating, the average VFH stock price target of $99.46 represents upside potential of 30.9%. Even the lowest price target of $81.88 is above VFH’s current price of $76, which could mean that the downside is limited at these levels.
Of the 193 analyst ratings on VFH, 53.89% are Buys, 38.34% are Holds, and 7.77% are Sells.
TipRanks uses proprietary technology to compile analyst forecasts and price targets for ETFs based on a combination of the individual performances of the underlying assets. Further, TipRanks calculates a weighted average based on the combination of all the holdings. The average price forecast for an ETF is calculated by multiplying each individual holding’s price target by its weighting within the ETF and adding them up.
Looking Ahead
Thanks to its investor-friendly expense ratio and diversified holdings, VFH looks like a smart way for investors to gain exposure to the early stages of a rebound in financial stocks. While sentiment towards the sector has been extremely negative, it seems like we are moving beyond the worst of it and into the early stages of a turnaround, as indicated by deal activity in the space and the intervention from the Federal Reserve as well as major banks that calmed the worst of investor fears.
The risk-to-reward setup for the sector looks even more compelling when looking at the valuations of VFH’s top holdings. Removing Berkshire Hathaway since it is a fairly unique stock, the price-to-earnings multiples for VFH’s top five holdings, for example, range from 7.6 at the low end (Wells Fargo) to 12.8 at the high end (JPMorgan).
This range presents a significant discount to the broader market. For instance, the S&P 500 currently has an average price-to-earnings multiple of 21.1. At these valuations, these stocks look attractive and should give investors a margin of safety when investing.
A position in VFH looks like a smart, low-cost way to gain exposure to these inexpensive financial stocks, adding the upside of improving sentiment toward them into your portfolio.
