Financials gain as larger holdings offset a steep drop in PayPal

On Friday, August 28, the Financials sector leaned on its largest holdings to deliver a modest gain, as 56.6% of its members advanced and heavyweights kept the group positive. The Financial Select Sector SPDR Fund, an exchange-traded fund trading as XLF, rose +0.4% to close at $58.10, outperforming an otherwise hesitant broader market where 5 of the 11 sectors rose. That relative strength came as central bank remarks signaled that inflation remained above target. Broader equity indexes slipped as expectations of possible interest rate hikes grew.

Inside the sector, the day showed a clear divergence between the largest firms and the wider field. The cap-weighted sector advanced +0.3%, while the equal-weighted measure fell -0.1%. When cap weighting outpaces equal weighting, larger balance sheets are carrying the load. That leadership helped the sector absorb a steep drag from PayPal Holdings Inc (-12.7%), which dropped after prospective suitors abandoned their takeover pursuit.

Gains in Arthur J Gallagher & Co (+2.8%) and Brown & Brown Inc (+2.7%) led the positive side of the sector, helping offset weakness across smaller constituents. The session's quiet advance built on recent momentum, lifting XLF to a gain of +1.9% over the past month.

The fund gives investors access to $57.9 billion in sector exposure at a low fee of 0.08%, pairing scale with a tilt toward higher-grade companies. EasyAlpha grades the stocks in the sector against their industry peers. Across XLF, 65.8% of the graded weight lands in companies graded A or B. Companies in those top two tiers have stronger fundamentals, and historically they have carried a lower risk of large drawdowns than companies graded D or E.