Financial services is the second-largest sector weight in the S&P 500 and at a time when software equities are being drilled and market breadth is widening, driving value fare higher, financial stocks merit closer examination.
In a recent report on the sector and its various exchange traded funds (ETFs), Bank of America Research outlines a compelling, multi-catalyst case for financial services stocks.
“We have a favorable view on financials due to strength in M&A volumes, asset manager revenues, and potential for deregulation and efficiency gains,” notes BofA. “Valuation remains attractive relative to historical averages and the broader market as well.”
Among other factors, BofA cites the 12-month forward earnings growth for financial ETFs that’s in excess of the S&P 500, price-to-book ratios that are below long-term averages and fund managers starting to overweight financial stocks as reasons to own the sector. That objective can be accomplished via a plethora of ETFs, including the Davis Select Financial ETF (DFNL).
Drilling Down on DFNL
Unlike the largest ETFs in the category, the nine-year-old DFNL is actively managed – a management style that offers some benefits with this sector. BofA seems to agree as it initiated coverage of the ETF with a rating of 1-FV – the highest grade the research firm assigns to ETFs.
“DFNL is an actively managed financials ETF with high conviction and low turnover in a portfolio with 30 stocks. We initiate at 1-FV on the highest risk-adjusted returns in category, high buy-rated stock exposure, and high sector favorability,” according to the bank.
Advantages offered by DFNL include a higher conviction roster of 31 stocks, or less than half what’s found in the benchmark. That implies the fund is holding cream of the crop financial services stocks. Another perk is flexibility. Say insurance stocks are out of favor but capital markets names are thriving, an active fund such as DFNL can be more responsive to that trend. It’s a hypothetical example, but one underscoring the point that actively managed sector funds can benefit investors.
Speaking of benefits, over the past five years, DFNL components have delivered better earnings growth than the S&P 500 Financial Services Index while sporting significantly lower price-to-earnings ratio, according to issuer data. Current holdings including Capital One (COF) and US Bancorp (USB), which combine for nearly 14% of the ETF’s portfolio compared to just 3% of the benchmark.
DFNL Industry Mix Looks Solid
As advisors know, the financial services sector is fairly expansive at the industry level. There’s insurance carriers, money-center banks, capital markets firms, credit card issuers and network operators, and more.
Despite a relatively small lineup, the Davis Select Financial ETF does an admirable job of touching a lot of the sector’s bases, though it features decent-sized exposures to banks and insurance providers. Regarding the former, BofA is bullish citing capital markets activity and wealth management trends. The research firm is slightly more reserved in its assessment of the insurance industry, but cautiously optimistic, too.
“We have a neutral view on insurance given pricing headwinds and weak returns (6% average ETF return in 2025) but see potential opportunity in cheap valuations and low earnings expectations. Fundamental analyst Josh Shanker views pricing weakness to continue in 2026,” concludes the bank. “However, strong fundamentals might counter the narrative as major insurance companies still see significant earnings growth.”
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