Is It The Right Time To Enter Financials? These ETFs Are On Fire Already

Ulli ETF News Contact

US stock-markets have performed remarkably well with most of the indexes scaling multi-year highs since the beginning of the year. It’s common knowledge that for the economy to do well, financial companies (primarily banks, credit unions and insurers) need to fire on all cylinders.

The economically sensitive categories like materials and consumer discretionary have performed well compared to 2011. Financials, quite expectedly, have also been a star-performer on YTD basis.

The Select Sector Financials SPDR (NYSEArca : XLF) has been topping the popularity charts for some time now, returning an impressive 21.5 percent since the beginning of the year. Yet there are other financial ETFs that have outperformed XLF quietly, away from the spotlight. Let’s turn our focus on three under-reported ETFs that have beaten XLF by handsome margins.

Consider the top pick RevenueShares Financial Sector Fund (NYSEArca : RWW). This product is different from traditional ETFs since it weights securities by revenues, rather than market cap. This strategy has certainly helped RWW since it has returned 27.5 percent since January, an impressive 5.9 percent higher than XLF. Compared to its peers, RWW’s portfolio looks different with more emphasis on insurers (39 percent) and other financial institutions (28 percent). Banks make up only 13 percent of the total assets. Berkshire Hathaway, JPMorgan Chase and Bank of America make up nearly 30 percent of total portfolio weight.

Annual fund expenses come to 49 basis points, which is slightly on the higher side. This product lacks liquidity and volumes can be lower than 10,000 shares a day, which can add to the total expense ratio as bid-ask margin is high at times.

The next name on the topper’s chart is the iShares Dow Jones US Financial Services Index Fund (NYSEArca: IYG). This US financial services focused ETF has returned 27.1 percent since January 2012, beating XLF by 5.6 percent YTD. The product charges 47 basis points annually and holds banking and financial firms primarily. Though the portfolio has 111 components, nearly 40 percent weight is concentrated on just four ‘big’ banks; JPMorgan, Well Fargo, Citigroup and Bank of America.

The PowerShares KBW Bank Portfolio (NYSEArca: KBWB) has returned 26.5 percent in the first three months of 2012 and has outperformed the XLF by about 5.2 percent. The fund has the lowest expense ratio among the three and annual fees come to 35 basis points only. The fund is heavily skewed towards banks with 75 percent of assets invested in that sector. Other financial services make up for the remaining 25 percent. KBWB uses a modified market-cap weighting strategy and holds about 24 stocks in its portfolio.

Whether you should jump aboard this late in the game is strictly a matter of your risk tolerance as prices during a downturn can correct sharply. If you decide to take the plunge, you should only do so if you follow my recommended exit strategy. For these types of sector ETFs, I recommend a trailing sell stop of 10% off the high since you made the purchase.

Disclosure: No holdings

Contact Ulli

Leave a Reply