Riding the Rally with Financial ETFs
By Ron DeLegge, Editor
April 10, 2009
SAN DIEGO (ETFguide.com) – After rubbing up against market lows in March, global stock indexes have posted strong gains since. Both the Dow Jones Industrial Average (NYSEArca: DIA) and Standard & Poor’s 500 (NYSEArca: SPY) are up around 25%. What’s been driving the market? Look no further than the beaten up financial sector.
In the banking segment, Well Fargo (NYSE: WFC) announced positive results, namely net income of $3 billion during the first quarter. Over the past year, the stock has been clobbered but on April 9th it rose 32% in value. It remains to be seen if Wells can sustain positive income growth over the next several quarters.
Let's look at three financial ETFs.
Financial Select Sector SPDR (NYSEArca: XLF)
This ETF follows financial stocks within the S&P 500. This particular industry sector covers stocks of companies involved in the banking, insurance and securities brokerage business. The healthcare industry accounts for 12.2% of the S&P 500’s overall sector weighting. With around $3.6 billion in assets, XLF is the largest financial ETF.
In 2008, XLF declined by 55.21% compared to a 38.49% fall in the S&P 500. XLF’s annual expense ratio is currently 0.21%.
RevenueShares Financial Sector Fund (NYSEArca: RWW)
This ETF follows the RevenueShares Financials Index, which contains the same holdings as the S&P 500 Financials Index, but weights stocks by each company's reported annual revenue. The fund’s index uses the same passive methodology for selecting its stock components as S&P, but uses a fundamental weighting approach. The fund is rebalanced annually.
Year-to-date RWW has declined by 11.30% compared to a 14.29% fall in XLF. RWW’s annual expense ratio is currently 0.49%.
Direxion Financial Bull 3x Shares (NYSEArca: FAS)
FAS seeks daily investment results, before fees and expenses, that correspond to three times (300%) the daily performance of the Russell 1000 Financial Services Index. The index consists of financial-related businesses, such as commercial and thrift banks, insurance companies, real estate investment trusts, asset managers, and securities brokers. The index is rebalanced monthly and the fund obtains its leverage by using a combination of derivatives, futures, and swaps
FAS has annual expenses of 0.95% and is mainly designed for traders or short-term investors interested in obtaining leverage.
As we’ve covered, financial ETFs are probably best suited for patient value oriented investors, looking to capture a rebound in this beaten up industry sector. Financial stocks still have many problems, particularly the banking area.
Financially weak consumers and a deteriorating commercial real estate market are of particular concern. Nevertheless, financial ETFs are a good way to diversify your risk away from individual stocks within this volatile sector.
*All performance figures quoted through April 9th market close