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Vanguard Financials ETF: You Can Safely Ignore The Flattening Yield Curve

Published Mon, 13 Aug 2018 20:13:25 -0400 on Seeking Alpha

Factor analysis Let’s start with a factor analysis (on the Portfolio Visualizer-website) of the Vanguard Financials ETF (VFH).
Exhibit 1: Vanguard Financials ETF factor analysis
Two things stand out: most important are the market- and the value-factor.
Exhibit 2: Sector-beta
The importance of value for financials is also reflected in the weight of financials in the Russell Value Index.
Exhibit 3: Sector-weight Financials

Our (positive) view on value you can read here.
And concerning the market, we expect the positive evolution to continue as long as there is no recession.
When we look at James Picerno’s Recession Probability Estimate, we can only conclude that a recession is not around the corner.
Exhibit 4: Recession Probability Estimate

Another interesting fact is the low percentage of small caps in the Vanguard Financials ETF. Our (negative) view on small caps you can read here. Morningstar’s Ownership Zone clearly labels the Vanguard Financials ETF as being large cap value.
Exhibit 5: Style analysis

Financials and interest rates The sensitivity of financials to interest rates is quite high.
Exhibit 6: Interest rate sensitivity

We expect long-term interest rates to slowly march higher in the coming ten years. So this is certainly a positive backdrop for financials. But the slope of the yield curve (and hence bank’s net interest margin) might be more important for... Read more