Financials Sector in 2022: What to Focus on This Year

We all know that 2021 took a battering ram to certain sectors (not to mention what happened in 2020). However, financial stocks showed a strong performance in 2021 — the 33% gain in the sector made it the fourth best-performing sector in the S&P 500. In fact, the largest U.S. banks have shown strong merger and acquisition activity. In addition, trust banks, brokerage companies and others have shored up higher retail trading volume.  

The Federal Reserve’s impending rate hikes and tapering of its bond-buying program this year attempt to browbeat high inflation. In general, that will make for a decidedly solid year for financials in 2022. 

Let’s go over what you can expect and some potential investments you may want to add to your portfolio.

What to Expect in the Financial Sector in 2022 

Focusing on large U.S. banks, consumer finance companies, mortgage-related businesses and securities-focused companies may be the key to 2022, particularly because the financial sector has historically been among the most sensitive to changes in interest rates. Many businesses do poorly in the wake of rising interest rates, but certain companies in the financial sector will benefit from higher interest rates. The Federal Reserve might do these companies (and you) a favor. 

Check out a quick description of how certain companies might fare this year and a few stocks and a few ETFs you might want to take a second glance at. 

Banks

Banks, which make up the bulk of the financial sector, include commercial banks, investment banks and universal banks. Bank stocks have projected to heave upward due to higher yields on loans due to the Fed’s soon-to-come policies. In a healthier economy, borrowers usually have an easier time making loan payments, which can also be a boon to bank stocks.

Comerica (NYSE: CMA)

Comerica, based in Dallas, has over $90 billion in assets and handles commercial loans and lines of credit, deposits, cash management, capital market products, international trade finance, letters of credit, foreign exchange management services and loan syndication services. It also offers fiduciary services, private banking, retirement services, investment management and advisory services, investment banking and brokerage services. 

Comerica would realize over $100 million of net interest income over the next year. If the Fed raises the federal funds rate past 1% over the next few years, profits may zip higher, boding well for adding Comerica to your portfolio.

Insurance

Insurance makes up the second-largest unit of the financial sector and includes a broad sweep of different types of insurance companies: property and casual, life and health, specialty as well as insurance brokers. The Insurance Revenue Landscape report expects global insurance industry revenues to grow to $7.5 trillion by the end of 2025, which means solid upward mobility in 2022 for insurance.

Prudential Financial Inc. (NYSE: PRU)

Prudential provides financial products and services including life insurance, annuities, mutual funds and investment management to both individual and institutional customers.

Prudential’s international insurance unit differentiates it from peers, a point of interest for investors. Prudential reported $1.49 billion in non-GAAP (adjusted) during the third quarter, or $3.78 in adjusted earnings per share (EPS). Prudential showed 22.7% year-over-year growth last year.

Financial Services

Some companies aren’t considered banks or insurers and fall into the “financial services” classification instead, helping with investing and public markets services. This division should benefit from higher retail trading volumes and generally rising markets. 

Mortgage REITs

While you might relegate mortgage REITs to the real estate sector only, they also firmly belong in the financial sector because they focus on financial real estate instruments. In a rising rate environment, you may want to give mortgage REITs a second glance for their high dividend yields (despite the traditionally high management fees of REITs). 

Special Purpose Acquisition Companies (SPACs)

Special purpose acquisition companies (SPACs), also called blank-check companies, are companies with no commercial operations and which choose an alternative path to an initial public offering (IPO). They are created to raise capital through an IPO to acquire an existing company, raise money and trade on a stock exchange. 

Unfortunately, when an array of 25 companies became public as the result of combining with a SPAC, they underperformed on the S&P 500 Index by more than 50 percentage points in 2021, according to Bloomberg. 

You’ll want to be careful investing in them, though certain companies might deserve a look in 2022. You might want to consider an ETF like the Defiance Next Gen SPAC Derived ETF (NYSEARCA: SPAK), which covers pre-deal SPACs and the post-merger companies to give you access to a lot of growth potential.

Financial Technology Companies (Fintech)

Financial technology (fintech) stocks declined in 2021, a disappointment compared to the S&P’s upper-twenties percentage point rally. Financial technology is the technology and innovation that aims to compete with traditional financial methods in the delivery of financial services. However, fintech has opportunities at its disposal, what with the traditional financial services behemoths with large branches, huge staffing needs and gigantic regulatory overhead, fintech players can operate much more lightly, with fewer players needed in the game. 

Blockchain and Cryptocurrencies

Blockchain is a peer-to-peer shared, distributed ledger that helps record and track assets in a business network. Blocks record and confirm the time and sequence of transactions logged into the blockchain. Cryptocurrencies, which operate on the blockchain, have generated a lot of up-and-down buzz in 2021. Bitcoin trades for $50,000 and trended up 60% in 2021. Ethereum has gone up 400% and Dogecoin forged ahead 3,400%. If you’re not sure about investing in digital currencies, consider an ETF for ample diversification.

Amplify Transformational Data Sharing ETF (NYSEARCA: BLOK)

BLOK, managed by Toroso Investments, LLC, is an actively managed ETF invests at least 80% of its net assets in the equity securities of companies actively involved in developing blockchain technologies. Due to the potential within blockchain and  good buying opportunity.

Add Financials to Your Holdings

Rising rates tend to point to a strengthening economy and many players in the financial industry are poised to benefit. Will you benefit as well?