In looking at and inside of the Financial Select Sector SPDR ETF (XLF) , it has been a mixed bag for financial stocks. In full, that index of 67 financial stocks that includes commercial banks, investment banks and credit card companies, is up less than 2%, lagging behind all the major stock market indices. Looking under the hood at some of the more heavily weighted positions in that index, we see market beating performance from Berkshire Hathaway (BRK.A) (BRK.B) , JP Morgan Chase (JPM) , and American Express (AXP) , which is offset by Goldman Sachs (GS) and Wells Fargo (WFC) , which are down more than 9% and 6%, respectively, so far in 2018.
Berkshire Hathaway is benefiting from the company's investment portfolio which Warren Buffett recently shared is benefiting from its position in Apple (AAPL) among others, and operating businesses. Trifecta Portfolio holding JP Morgan Chase is up on higher investment banking fees year over year, expectations for higher interest fee income as the Fed is poised to boost rates, a recent dividend boost as well as some moves aimed at increasing its customer base. American Express shares, which we also own in the Trifecta Portfolio, is poised to benefit from the expected increase in travel spending, both personal and corporate, tight expense control and EPS growth that should help narrow the valuation discount relative to MasterCard (MA) and Visa (V) .
Turning to Goldman Sachs, it is currently facing one of its longest stock price losing streaks since going public in 1999. Some of this could stem from the recent news that Goldman was putting its cryptocurrency trading desk on hold, a move that could have led to some expectations being revised lower. Then there is the fact that despite retaining its number two position in the investment banking league tables so far in 2018, its fees are up modestly year over year and lag behind JP Morgan and Morgan Stanley (MS) . According to those league tables, JP Morgan is leading in Global Investment Banking, M&A advising, Bond issuance, with Goldman Sachs taking the pole position in the equity market, which primarily includes initial public offerings and follow on offerings. The outlook for the equity market, with just over two weeks to go, looks to be down compared to the $210.9 billion in issuances reached in the June quarter. Because Investment Banking accounted for 22% of Goldman's June quarter, revenue odds are that a potential shortfall is weighing on its shares more than the cryptocurrency trading desk.
Turning to Wells Fargo, it is staring down another federal investigation, which is related to claims of wholesale banking employees who altered and/or added information to documents without customers' knowledge. According to reports, the U.S. Department of Justice investigation is coming on the heels of allegations centered on fraudulent practices and whether those were the direct result of management pressure. To me, that rekindles past management credibility concerns, which tends to put a company's shares in the penalty box until at least a few quarters have passed and the underlying issues have been addressed.
What does it all mean?
While ETFs have garnered meaningful inflows over the last 18 months, there are times when investors need to distinguish between an ETF's constituent, especially when the holdings are rather diverse like with Financial Select Sector SPDR ETF. In other words, know what you own and why. Heeding that advice is what we've done in the Trifecta portfolio with JPM and AXP shares, and it's a strategy we'll continue to follow.
(Goldman Sachs, JP Morgan and Apple are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells GS, JPM or AAPL? Learn more now.)
