Financials have been all-star performers over the past year, crushing the broad market in the process. The most popular financial ETF, the SPDR Select Sector Financial Fund (XLF), is now up roughly 40% in the past year, easily outpacing the next closest sector—consumer discretionary (XLY) at 34.4%– and nearly doubling the S&P 500 in the time frame.
There are a number of reasons for this impressive performance in the financial space, as the sector has fought back from the crisis years and is now on solid footing. It also hasn’t hurt that macro risks have been largely reduced, while concerns over further losses in the banking sector are minor at this point.
Beyond these reduced risks, recent events have helped a number of companies in the space too, specifically the steeper yield curve. This has made it far easier for banking institutions to earn a solid profit—thanks to a wider spread—while it has also increased the income that many money managers can earn on their portfolios.
Finally, recent talk from the Fed and the shifting market has been a boon for security exchanges as well. This space has benefited from increased demand for its services—thanks to more interest in trading– suggesting that 2013 has been a pretty great year so far for the entire financial sector (see 3 Surging Financial ETFs Beating the Market).
Best Plays in the Sector?
Financials have had a great run based on some of the above trends, and given the current market environment, there is no reason to believe that this cannot continue, especially with the sluggish earnings hitting a number of other sectors. While XLF could be a great play for the continuation of this trend, there are several more specialized financial ETFs that are also intriguing plays in this environment, and may be currently overlooked picks by many investors.
Below, we highlight three of our favorite ETFs in the financial space which have been outperforming XLF lately. These all have Zacks ETF Ranks of 2 or better too, and thus could also be well-positioned to take advantage of the market heading into 2013’s final stretch:
iShares U.S. Insurance ETF (IAK)
This ETF tracks the Dow Jones U.S. Select Insurance Index, following a group of full line insurance, property and casualty insurance, reinsurance, and life insurance providers. In total, the fund holds about 70 stocks in its basket, charging investors 47 basis points a year in fees.
Property and casualty providers make up the most at about 50% of the portfolio, followed by life insurance (34%), and then full line (15.8%). Top holdings include AIG, Metlife, and Prudential, while roughly 60% of the portfolio goes towards the top ten stocks.
IAK has performed well over the past three months adding about 10.5%, while it has moved higher by 43.5% in the past 52 week time frame. This fund has a Zacks ETF Rank #2 (Buy) and a medium risk rating, so its outperformance could definitely continue.
PowerShares KBW Bank Portfolio (KBWB)
KBWB follows the KBW Bank Index, tracking companies that do business as banks or thrifts that are publicly- traded in the U.S. There are roughly two dozen companies in the basket—consisting mostly of national money center and region banks—while the fund charges investors a relatively cheap 35 basis points a year in fees.
The company has a nice mix of both big banking institutions, and smaller thrifts in its portfolio, though roughly two thirds of the assets are in large cap stocks. Some top holdings include the big four of Citigroup, JP Morgan, Bank of America, and Wells Fargo, although SunTrust, Regions Financial and M&T Bank round out the rest of the top seven (see 3 Sector ETFs to Profit from Rising Rates).