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Traders Up The Ante With Financial ETF

October 04, 2017: 10:08 AM ET

The Financial Select Sector SPDR (NYSE: XLF), the largest exchange traded fund dedicated to the financial services sector, attempted to shake its laggard status in the third quarter, posting a solid gain of 3.7 percent.

After confounding investors with its laggard ways in the first half of 2017, XLF is now up an admirable 12.3 percent year-to-date and residing near new highs. Some data points suggest investors are comfortable wagering on more upside for the big financial services ETF.

“XLF has notably outpaced the broad market in the trailing one month period, although it is still lagging the S&P 500 by a bit year-to-date,” said Street One Financial Vice President Paul Weisbruch in a note out Tuesday. “Some may see the recent one month out-performance as the sector potentially narrowing the gap ahead of corporate earnings season, which is of course anticipated shortly for the Financials.”

Some options traders have recently been gobbling up December $27 calls in XLF. It's not a stretch to say that is a high probability trade as XLF closed just over $26 on Tuesday.

“XLF remains the 'go-to' fund in this sector in many ways however, even after all of these years (XLF debuted back in 1998) largely because of the popularity and depth and liquidity in its listed options,” said Weisbruch. “Today’s trading provides no exception, as we have seen good sized activity (over 50,000 contracts traded thus far) in the December 27 calls in XLF. With more than two months left until expiration, these options cover the next earnings cycle for this entire group.”

XLF allocates nearly 23 percent of its combined weight to just two stocks – Warren Buffett's Berkshire Hathaway Inc. (NYSE: BRK-B) and Dow component JPMorgan Chase & Co. (NYSE: JPM).

In the third quarter, investors added nearly $1.9 billion in new assets to XLF, good for the best total among all sector ETFs. Only eight other ETFs saw larger third-quarter inflows than XLF.

XLF devotes just over 44 percent of its weight to bank stocks, 20.6 percent to capital markets firms and 18.7 percent to insurance providers.

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Disclosure: The author owns shares of XLF.

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Nasdaq 6,624.01 18.21 0.28%
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Treasuries 2.31 0.03 1.18%
Data as of 6:09pm ET
Company Price Change % Change
Bank of America Corp... 26.24 0.41 1.59%
General Electric Co 23.36 0.38 1.65%
PG&E Corp 53.43 -4.29 -7.43%
Advanced Micro Devic... 14.26 0.04 0.28%
Micron Technology In... 41.49 1.09 2.70%
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