In a recent article that discussed the components of the S&P 500, we had stated that ETFs based on Oil & Gas as well as Financials had been showing a subtle increase in volumes. While the value proposition and outlook for the energy sector was outlined in an earlier article, the outlook for financials merits a more detailed analysis.
The Year So far
The outlook for the banking industry in 2022 had largely been upbeat, given how sector performance is strongly correlated with events such as the reserve releases and improving loan growth, better investment manager performance, rising premiums and insurance, property price indexes in real estate in recent times. However, U.S. inflation rates hitting 40-year highs present a scenario that historically witnesses gold prices rising if efforts to contain inflation don’t have significant effect. Over the months since the new year, there has been little sign of abatement in price increases for household goods, food and energy even before Russia’s “special military operation” in Ukraine.
Meanwhile, crypto investments, while increasing in volume, hasn’t seen nearly the same immunity to “fiat” market events that some popular crypto proponents had long asserted in the past. For example, while Bitcoin ushered in the new year with a 62.3% increase in value on a year-on-year basis, it rapidly shed 19% over the course of January. While prices did improve over the next month, March began with the benchmark cryptocurrency down nearly 7% relative to the new year and April began with it being 3% down.
Gold, financial stocks and cryptocurrencies can broadly be considered as the equivalent “money” instruments: in some way or form, they either “represent” wealth or “process” wealth. For gold, lets consider the VanEck Vectors Gold Miners ETF (GDX) while the financial sector is represented by the the Financial Select Sector SPDR ETF (XLF). To zero in on the banking sector specifically, lets also consider the stocks for HSBC, Barclays, JPMorgan, Citigroup and Goldman Sachs.
ETF Comparison
Just as with the ETF analysis executed in the article on energy instruments, ratios are calculated in the constituent average as well as weighted average format over a series of one-year windows – plus two additional points in the current year – in order to evaluate the two ETFs.
