November 20, 2017 by Hamilton Capital

The holdings within the Hamilton Capital U.S. Mid-Cap Financials ETF (HFMU.U) reported a very strong Q3, posting portfolio-weighted earnings growth of ~12% Y/Y. This compares to just 1% Y/Y for the U.S. financials[1]. The two most important factors contributing to HFMU.U’s much higher growth were: (i) its substantial overweight position in U.S. mid-cap banks (which are largely unrepresented in the Index, but are experiencing the highest growth), and (ii) the HFMU.U’s underweight position to P&C insurance, whose earnings were negatively impacted by the catastrophe losses from the recent hurricanes. HFMU.U also benefited from its mid-cap positioning, as the mid-caps experienced higher growth than their large-cap peers in each of the sub-sectors represented in the S5FINL index.

Attractive yield

As mentioned, HFMU.U’s largest weighting is to U.S. mid-cap banks, which continue to experience higher EPS growth. Nevertheless, macro events, namely the market’s revised (downward) expectations for Fed Funds rate increases has resulted in the more rate-sensitive mid-cap banks trading near multi-year lows relative to both the U.S. large-cap banks (figure, left) and U.S. financials (figure, right) implying the subgroup is very oversold relative to its larger peers.

With over 500 U.S. mid-cap financials (i.e., those with market caps between $0.5 bln and $20 bln), we believe there is significant opportunity to construct a portfolio with exposure to higher growth regions/MSAs (and higher revenue/earnings growth) and more targeted attributes including higher rate sensitivity, M&A potential, and valuation support.


1 The U.S. financials are represented by the holdings within the Financial Select Sector SPDR Fund, which seeks correspond with the S&P Financials Selector Sector Index, the S5FINL Index. Earnings growth for each position is calculated using most recent quarterly adjusted EPS (or FFO) divided by the prior year’s quarterly adjusted EPS (or FFO), capped at +/- 100%.
2 Price ratio of the KBW Regional Banking Index vs. the KBW Bank Index as of November 15, 2017
3 Price ratio of the KBW Regional Banking Index vs. the Standard and Poor’s 500 Financials Index as of November 15, 2017

Note: Comments, charts and opinions offered in this commentary are produced by Hamilton Capital and are for information purposes only. They should not be considered as advice to purchase or to sell mentioned securities. Any information offered is believed to be accurate, but is not guaranteed.


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