Just as many popular tech stocks are showing some signs of weakness, financial stocks are quietly gaining momentum and look well-positioned to enjoy further gains based on their inexpensive valuations. While it certainly doesn’t receive the same fanfare as the Tech sector, the Financial sector has been on fire. The Financial Select Sector SPDR Fund (XLF) recently hit an all-time high and is up a healthy 4.4% over the past month.

Simultaneously, its Tech sector counterpart, the Technology Select Sector SPDR ETF (XLK), has been roughly flat over the same time frame. This recent momentum adds to XLF’s strong performance over the past year. The ETF is quietly up 24.2% over the past 12 months, nearly matching XLK’s 28.8% move, even though financials haven’t received nearly the same plaudits as tech stocks.

While XLF is performing well, it’s not too late to consider starting a position in the ETF, and there could still be plenty of upside ahead based on the cheap valuation of its portfolio. I’m bullish on XLF based on its recent momentum and the inexpensive nature of its holdings. These factors could make it an attractive place for investors to allocate profits if a rotation from large-cap tech to other sectors takes place and the market rally expands beyond big tech.

What Is the XLF ETF’s Strategy?

With $40.8 billion in assets under management (AUM), XLF is the largest and most liquid ETF focused exclusively on the financial space.

The ETF simply invests in the financial sector of the S&P 500 (SPX). According to the fund, stocks in this sector can include those in “financial services; insurance; banks; capital markets; mortgage real estate investment trusts (“REITs”); and consumer finance.” Thus, it’s a broader sector than perhaps meets the eye at first glance.

XLF’s Holdings

XLF owns 72 stocks, and its top 10 holdings make up 54.4% of the fund. Below, you’ll find an overview of XLF’s top 10 holdings using TipRanks’ holdings tool.

While financial stocks have performed well in recent months, the valuations of these holdings are still inexpensive, especially when compared to the broader market; the S&P 500 (SPX) trades at 24.4 times earnings, but XLF trades at a significantly cheaper 17.0 times earnings.

And this overall valuation is skewed by some of the larger holdings like Visa (V) and Mastercard (MA), which trade at above-average multiples, masking some of the bigger bargains found within the fund.

For example, the fund’s second-largest holding, JPMorgan Chase (JPM), the bluest of blue-chip financial stocks, trades at just 12.3 times 2024 earnings estimates, and its peer, Citigroup (C), trades at just 11x forward earnings.

Meanwhile, other holdings like US Bancorp (USB) trade at just 11.3 times 2024 earnings estimates, while its peer, PNC Financial (PNC), trades at 13.7 times 2024 earnings estimates.

The relatively large dividend yields that many of these financial stocks sport may also be an indication that they are undervalued. For instance, US Bancorp yields 4.4%, while PNC Financial yields 3.6%, and Citigroup yields 3.25%.

Financial Stocks Are Performing Well

At the same time that these financial stocks trade at discounted multiples, they have been performing well, posting strong results and painting a rosy forward outlook, illustrating the attractiveness of the sector as a whole.

For example, top-10 holding Bank of America (BAC) just reported Q2 earnings. The company beat earnings and revenue expectations, in large part thanks to rising revenue from its Investment Banking and Asset Management businesses, plus an increase in Trading revenue.

Even better, Bank of America reported that it expects net interest income to increase during the fourth quarter, which was well received by the market, as this is a key metric for bank stocks and one of the primary ways that banks make money.

XLF’s second-largest holding, JPMorgan Chase, also topped earnings and revenue estimates thanks to a massive 52% surge in Investment Banking fees, while CitiGroup (C) beat on both earnings and revenue, thanks to a 60% surge in revenue from its own Investment Banking business.

Further, fellow top-10 holding Goldman Sachs (GS) recently reported strong earnings in which it also topped earnings and revenue estimates. This was due to strong results from its Fixed Income business and lower provisions for credit losses.

Even prominent regional banks like US Bancorp, which have less exposure to investment banking, posted strong results. US Bancorp surpassed top- and bottom-line expectations based on deposit growth and lending growth.

Strong Smart Score Ratings

These stocks are cheap, performing well, and are also highly rated by TipRanks’ Smart Score system. The Smart Score is a proprietary quantitative stock scoring system created by TipRanks. It gives stocks a score from 1 to 10 based on eight market key factors. A score of 8 or above is equivalent to an Outperform rating.

An impressive seven out of XLF’s top 10 holdings receive Outperform-equivalent Smart Scores of 8 or above, including the aforementioned Bank of America, which clocks in a “Perfect 10” Smart Score. Further down XLF’s list of holdings, aforementioned stocks like Citigroup, US Bancorp, and PNC Financial all receive 10 out of 10 Smart Scores.

What Is XLF’s Expense Ratio?

With an expense ratio of just 0.09%, XLF is a nice, cost-effective option for investors. An expense ratio of 0.09% means that an investor will pay just $9 in fees on an annual basis for every $10,000 invested in the fund.

Is XLF Stock a Buy, According to Analysts?

Turning to Wall Street, XLF earns a Moderate Buy consensus rating based on 54 Buys, 16 Holds, and three Sell ratings assigned in the past three months. The average XLF stock price target of $46.54 implies 8% upside potential from current levels.

See more XLF analyst ratings

Strong Momentum, With More Runway Ahead 

I’m bullish on XLF based on its recent momentum, as the market appears to be rotating, and sectors beyond big tech look like they are starting to join the bull run. I’m also bullish because of the strong results many of its holdings are posting. Further, XLF looks like it has plenty of upside ahead based on the cheap valuation of many of its holdings, making the sector and the ETF an intriguing opportunity for investors seeking opportunities beyond tech.

Disclosure