With 96% of the fund having reported Q4-2017, the holdings in Hamilton Capital U.S. Mid-Cap Financials ETF (USD) (HFMU.U) have recorded year-over-year portfolio weighted EPS growth of over 18%, which is more than double the 7.6% growth reported by the U.S. large-cap Financials (100% reported). Last quarter – Q3-2017 – HFMU.U’s holdings outgrew the large-caps by 11% (i.e., 12% for HFMU.U versus 1% for the large-cap index).1

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The largest contributor to HFMU.U’s much higher growth was the performance of its mid-cap bank holdings, which represent over 60% of the ETF (and are largely unrepresented in the index). These 40+ banks grew year-over-year EPS by 22%, which was double the large-caps and nearly four times higher than the mega-caps, which represent a huge 33% of the U.S. large-cap financials index. That said, HFMU.U’s higher growth was evident across virtually all sub-sectors, including wealth management & other (HFMU.U at 20%; large-caps at 10%) and insurance (HFMU.U at 8%, versus large-caps with negative EPS growth of 4%).

Nevertheless, despite materially lower EPS growth than their mid-cap peers, the share prices of the U.S. large-caps have disproportionately benefited from a continued sector rotation into the financials, primarily through multiple expansion. So, notwithstanding their superior EPS growth, the U.S. mid-caps are trading at or near 8 year lows versus the large-caps, implying the group is historically oversold (see charts below). It would also support a rebalancing from certain large-cap financials in favour of HFMU.U.

2018-02-26-hfmu-u-posts-18-eps-growth-y-y

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 with more targeted attributes, including higher rate sensitivity, M&A potential, and valuation support.

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Notes

[1] The U.S. financials are those represented by 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 February 23, 2018
[3] Price ratio of the KBW Regional Banking Index vs. the Standard and Poor’s 500 Financials Index as of February 23, 2018

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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