Banks are breaking out into earnings. Here’s how to play the sector

It’s a moment of truth for the financials sector as big banks gear up to report earnings this week.

Citigroup kicked things off for the group Monday morning, rallying 4 percent despite missing on revenue thanks to weak trading. This sent the financials-tracking ETF (XLF) higher for the day with Citi leading the charge.

And as investors brace themselves for the rest of the big bank earnings, Tom Lydon of ETFtrends.com said that the best way to play the group is to actually look to a more “pure” play: the KBW Bank Index (KBE).

“These are small- to mid-sized banks, well-diversified, equal-weight portfolio and as interest rates continue to rise, this is the bread and butter of the banking business,” he said Monday on CNBC’s “ETF Edge.” “So I think long term, that’s a better play.”

Additionally, Lydon stresses that the banks in the KBE are U.S.-oriented whereas many of the big banks in XLF are affected by global currency moves and global markets. This shields many of the banks in the KBE, which includes Bank OZK and PacWest Bancorp, from global variables that could prove to be headwinds.

But there’s another area that Lydon suggests investors get in on: the financial technology space. Sam Masucci of the ETF Managers Group also recommends fintech given the space’s explosive growth.

“$22 billion of Cyber Monday was done through mobile payments, up 50 percent year over year, so it’s an exciting place to be,” Masucci explained on “ETF Edge.”

Masucci specifically refers to a mobile payments ETF (IPAY) as a way to play the space. The ETF’s biggest holdings include PayPal, Visa, Mastercard, American Express and Square, which were some of the market’s hottest trades from last year.

Since its inception in July 2015, the ETF has soared about 46 percent as fintech and the mobile payment space continue to grow. “People are looking for tremendous growth opportunities and new technologies, disruptive technologies, and certainly in this sector it’s mobile payments,” said Masucci.

J.P. Morgan and Wells Fargo are set to report earnings Tuesday, followed by Bank of America and Goldman Sachs on Wednesday. Morgan Stanley rounds out big bank earnings when it reports Thursday.

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