Does Your Portfolio Need A Financial ETF? (XLF, RWW, KME, KRE, IAI, IAK)
Eric Dutram: Although scandals and worries over euro zone debt continue to hang over the financial sector, the segment has been undeniably a great place to be in 2012. Industries in this sector have risen either in line or well above the broad market so far this year, and are finally storming back to their former glory levels.
Furthermore since these issues remain hanging over the market, valuation levels are still relatively reasonable for many stocks in the financial sector, suggesting that there could still be room to run. This could be especially true if rates remain stable and if default rates continue to stay at a low level, allowing many financial institutions to clean up in the market.
Yet with that being said, there are a number of very specific ways to play the financial sector, be it in the broad space, insurance, broker-dealers, or any number of other niche industries. Each of these segments has their own pros and cons and no one industry is suitable for every investor.
Luckily for investors, there are a number of ways to play the financial sector with ETFs. Funds exist that delve into specific types of financials, while there are also several that attack the space from a broad perspective (see Beware These Three Volatile Financial ETFs).
Given the vast ways to play the space and the relatively solid performance of the sector so far in 2012, it could be worth it to take a closer look at some of the financial sector ETFs on the market. Below, we highlight six of the most popular ETFs in this increasingly in-focus sector for those who are seeking to make a targeted play on the space:
Financial Select Sector SPDR (NYSEARCA:XLF) is by far one of the biggest, oldest and most popular name in the financial ETF space. The fund has been in existence for over 12 years and has seen many ups and downs.
It seeks to replicate as closely as possible, the before-expense price and yield performance of the S&P Financial Select Sector Index. The index measures the performance of the broader financial sector.
It provides the choice of a cost effective investment avenue for investors looking for financial sector exposure as it charges a paltry 18 basis points in fees and expenses. The fund holds 82 securities, allocating 50.26% of its total assets in the top 10 holdings. Heavyweights like Wells Fargo, J.P. Morgan, Berkshire Hathaway and Citigroup are some of its top holdings.
The fund can be considered to be a mirror image of the performance of the financial sector in the U.S economy as it tracks some of the biggest names in this sector. XLF has proved its sustainability and solvency, given its period of existence and an asset base of around $7 billion.
It continues to excite investors as is evident from its average daily volume, which stands tall at around 83 million shares. The ETF also pays out a yield of 1.52% per annum (see Three Financial ETFs Outperforming XLF).
RevenueShares Financial Sector ETF (NYSEARCA:RWW) Launched in November of 2008, amidst the financial crisis, RWW seeks to outperform the financial sector of the S&P 500 Index before fees and expenses. It does this by investing in a broad benchmark of financials but it weights stocks by total revenue rather than by market capitalization.
This results in a portfolio that is tilted away from high profit margin and smaller companies and is instead focused in on behemoths or do a great deal of revenues and may not see the biggest margins. For example, Berkshire, JPM, and BAC take the top three spots in the fund’s composition.
Unfortunately, the product hasn’t really caught on with investors, as it has amassed just over $10 million in assets. This results in low volume levels which could result in higher bid ask spreads than some of the other funds on the list.
However, as the risk-appetite for investors increases on account of favorable economic data in domestic as well as global markets and given the consolidation of the financial sector as a whole, RWW may gain popularity. This is assuming of course investors can overlook the 54 basis point expense ratio and instead focus in on the different exposure that the product gives.
SPDR S&P Mortgage Finance ETF (NYSEARCA:KME) seeks to resemble S&P Mortgage Finance Select Industry Index before fees and expenses. The index is derived from the mortgage financing, processing and marketing segment of the U.S equity market. The components of the index have an average estimated EPS growth of 9.1%.
However, the fund does not lay much emphasis on current income as indicated by its dividend yield at 1.80% per annum. Although the fund holds only 47 securities in total, just 29.05% of its total assets are in its top 10 holdings. It thereby offers investors a well diversified portfolio, only putting 4.1% in its top holding.
The fund charges a paltry 35 basis points in fees and expenses making it a low cost choice in this space, especially when compared to its more real estate-focused peers (read Guide to MBS ETF Investing).
SPDR S&P Regional Banking ETF (NYSEARCA:KRE) was launched in June of 2006 and seeks to track, before expenses, price and yield performance of the S&P Regional Banks Select Industry Index. It does this by employing an equal weighting methodology across the entire index portfolio.
Although the fund includes stocks from the entire spectrum of market capitalization, it has a particular bias towards small cap stocks. More than half of its total assets are allocated in the small cap stocks. The ETF holds 75 securities in all and allocates 18.62% of its assets in the top 10 holdings.
The product could also be an interesting pick for investors seeking more of a local tilt in their financial exposure, or for those looking for more pint sized security exposure. Furthermore, fees are reasonable with the expense ratio standing at 0.35% while total assets are pretty good at around $1.01 billion.
iShares Dow Jones US Broker-Dealers ETF (NYSEARCA:IAI) seeks to track the performance of the Dow Jones U.S. Select Investment Services Index before fees and expenses. The index tracks companies in the investment services sector, a sub-sector within the broader financial sector of the U.S economy.
IAI employs a representative sampling technique to include stocks in its portfolio. This ETF is appropriate for investors looking to get exposure to brokerage firms, dealers and other facilitators directly involved in the capital markets (see more in the Zacks ETF Center).
The fund currently holds 25 securities and does well in allocating just 57.74% of the total assets in its top 10 holdings. Goldman Sachs Group Inc, Morgan Stanley, CME Group, Inc., Charles Schwab Corp and Ameriprise Financial Inc are some of its top holdings.
IAI tracks a niche segment of the broader financial sector, the performance of which is largely dependent on the performance of the capital markets. It charges investors 0.47% as expenses and pays out 1.23% as yield (read Invest Like the 1% with These Three ETFs).
iShares Dow Jones US Insurance ETF (NYSEARCA:IAK) launched in May of 2006. IAK is an insurance ETF which tracks the Dow Jones U.S. Select Insurance Index. The index measures the performance of the insurance sector of the U.S. equity market.
The ETF holds 64 securities and is appropriate for investors looking for a multi cap play on the insurance industry. The ETF charges investors 47 basis points in fees and expenses and pays out 1.63% as yields. It has total assets of about $70.94 million.
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