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Top 10 Financial ETFs

There are currently nearly 40 ETFs oriented to the financial sector. The following analysis features a reasonable list of ETF selections. We believe these constitute the best index-based offerings individuals and financial advisors may utilize.

ETFs are based on indexes tied to well-known index providers including Russell, S&P, Barclays, MSCI, Dow Jones and so forth. Also included are some so-called "enhanced" indexes that attempt to achieve better performance through more active management of the index.

The financial sector has been at the epicenter of economic and stock market woes during the 2008-2011 (and perhaps beyond) periods owing primarily to the housing bubble bust and collapse of security products created to accommodate rising real estate prices. As investors know this collapse has led to ongoing bailouts and bankruptcies. The sector is on the mend to start 2012. It's quite remarkable that from mid-November to mid-February 2012 (a three month span) many ETFs featured have gained as much as a stunning 50%.  Even the most seasoned issues like XLF have reversed from 25% losses to 12% gains. This puts the entire sector as overbought since this pace of gain is typically unsustainable.

Markets overall are in rally mode to begin 2012 albeit on ultra-light volume. One thing is historically true; there has never been a sustainable bull market without financials being with the trend or a leader. Investors need to pay attention to this going forward and monitor this relationship.

One thing you'll note with charts posted are the similarities in trends and performance from one to another. This isn't a coincidence given overall index constituent similarities. Further, the easy money policies of the Fed during the period covered have made performance results hardly distinguishable one from another.

There are catchall sectors like XLF covering the entire sector and individual areas like banking, brokering and insurance for investors wishing to isolate and target their focus. So-called "enhanced" indexes can outperform on the upside but perhaps underperform as markets decline. We believe for these ETFs a more active trading approach is necessary.

We feature a technical view of conditions from monthly chart views which we believe adds value to the process. Simplistically, we recommend longer-term investors stay on the right side of the 12 month simple moving average. When prices are above the moving average, stay long, and when below remain in cash or short. Some more interested in a fundamental approach may not care so much about technical issues preferring instead to buy when prices are perceived as low and sell for other reasons when high; but, this is not our approach.

Premium members to the ETF Digest receive added signals when markets become extended such as DeMark triggers to exit overbought/oversold conditions.

For traders and investors wishing to hedge, leveraged and inverse issues are available to utilize from ProShares and Direxion and where available these are noted.

#10: PowerShares Dynamic Financial ETF (PFI)


PFI follows the Dynamic Intellidex Index which is comprised of stocks of U.S. financial companies. The Index is designed to provide capital appreciation by thoroughly evaluating companies based on a variety of investment merit criteria, including fundamental growth, stock valuation, investment timeliness and risk factors.

This is another "enhanced" index where the goal is to outperform more static indexes in all market conditions. The fund was launched October 2006. The expense ratio is .60%. AUM equal $19 million and average daily trading volume is 7K shares. As of mid-February 2012 the annual dividend yield was 1.04% and YTD return 7.86%. The one year return was -1.54%.

(Note: AUM is less than $25M which generally is the threshold for a successful fund with good liquidity. AUM less than $25M is generally the threshold for a successful fund with good liquidity. Despite lower AUM and low trading volume the returns overall have been relatively better, merit close monitoring and your consideration.)

PFI Top Ten Holdings & Weightings

Data as of First Quarter 2012
  1. Fifth Third Bancorp (FITB): 2.60%
  2. Principal Financial Group (PFG): 2.57%
  3. U.S. Bancorp (USB): 2.52%
  4. MetLife Inc (MET): 2.50%
  5. Citigroup Inc (C): 2.49%
  6. Aflac Inc (AFL): 2.48%
  7. Lincoln National Corp (Radnor, PA) (LNC): 2.47%
  8. CNA Financial Corp (CNA): 2.46%
  9. Chubb Corp (CB): 2.42%
  10. ACE Ltd (ACE): 2.41%

#9 PowerShares S&P Small Cap Financials (PSCF)

PSCF follows the S&P 600 Small Cap 600 Index which is comprised of common stocks of U.S. financial service companies that are principally engaged in the business of providing services and products, including banking, investment services, insurance and real estate finance services.

The fund was launched in April 2010. The expense ratio is .29%. AUM equal $75 million and averaged daily trading volume is 12K shares. As of mid-February 2012 the annual dividend was 1.89% and YTD return was 6.36%. The one year return was 6.75%.

(Note: Small cap issues generally have higher beta but may offer some safe harbor away from mortgage related troubles afflicting the larger and well-known firms.)

PSCF Top Ten Holdings & Weightings

Data as of First Quarter 2012
  1. BioMed Realty Trust Inc (BMR): 3.03%
  2. Tanger Factory Outlet Centers (SKT): 2.77%
  3. Proassurance Corporation (PRA): 2.69%
  4. Delphi Financial Group (DFG): 2.67%
  5. Mid-America Apartment Communities (MAA): 2.61%
  6. Post Properties Inc (PPS): 2.50%
  7. Extra Space Storage, Inc. (EXR): 2.49%
  8. Kilroy Realty Corporation (KRC): 2.46%
  9. Entertainment Properties Trust (EPR): 2.26%
  10. LaSalle Hotel Properties (LHO): 2.21%

#8: First Trust Financials AlphaDex ETF (FXO)

FXO follows the StrataQuant Financials Index which is an "enhanced" index developed, maintained and sponsored by the NYSE Euronext. It creates financial stocks for the index from the Russell 1000 index. The fund was launched in May 2007. The expense ratio is .70%. AUM is currently near $122M while average daily trading volume is near 110K shares.

As of mid-February 2012 the annual dividend was 2.34% and YTD return was 10.24%. The one year return was -3.15%.

(Note: the key determinant with enhanced indexes is they "should" outperform on the upside and "may" underperform on the downside. This makes for more active position management from our view.)

FXO Top Ten Holdings & Weightings

Data as of First Quarter 2012
  1. Protective Life Corp (PL): 1.42%
  2. StanCorp Financial Group, Inc. (SFG): 1.32%
  3. KeyCorp (KEY): 1.28%
  4. Lincoln National Corp (Radnor, PA) (LNC): 1.23%
  5. CoreLogic, Inc. (CLGX): 1.20%
  6. Weyerhaeuser Co (WY): 1.19%
  7. American Financial Group Inc (AFG): 1.17%
  8. Visa, Inc. (V): 1.17%
  9. MasterCard Incorporated A (MA): 1.16%
  10. Allied World Assurance Company Holdings AG (AWH): 1.16%

#7: SPDR S&P Regional Banking ETF (KRE)

 KRE follows the KBW Regional Banking Index. Launched in June 2006 the index uniquely consists of an equally weighted index of regional bank issues. (Note: it is thought some of these banks are more immune to global credit risk conditions which may only be partly the case.) The expense ratio is .35%. AUM equal $1.4 billion and average daily trading volume is a high 3M shares.

The high volume means more speculation within the sector given more options trading and the employment of long/short strategies. As of mid-February 2012 the annual dividend was 1.70% and YTD return was 8.68%. The one year return was 1.77%.

KRE Top Ten Holdings & Weightings

Data as of First Quarter 2012
  1. Regions Financial Corporation (RF): 2.04%
  2. Synovus Financial Corp (SNV): 1.99%
  3. SVB Financial Group (SIVB): 1.98%
  4. SunTrust Banks Inc (STI): 1.93%
  5. Popular Inc (BPOP): 1.92%
  6. Associated Banc-Corp (ASBC): 1.88%
  7. Susquehanna Bancshares Inc (SUSQ): 1.86%
  8. PrivateBancorp Inc (PVTB): 1.85%
  9. East West Bancorp Inc (EWBC): 1.85%
  10. BB&T Corp (BBT): 1.84%

#6: SPDR S&P Bank ETF (KBE)

KBE tracks the KBW Bank Index. It features a much more targeted approach to the sector toward banks obviously. It was launched in August 2005. AUM exceeds $1.4 billion and average daily trading volume is over 3.4M shares. The expense ratio is .35%.

As of mid-February 2012 the annual dividend was 1.77% and YTD return was 10.44%. The one year return was -17.65%.

There are some developing inverse and leveraged long/short issues available for the sector.

KBE Top Ten Holdings & Weightings

Data as of First Quarter 2012
  1. Regions Financial Corporation (RF): 3.06%
  2. Bank of America Corporation (BAC): 3.01%
  3. SVB Financial Group (SIVB): 2.96%
  4. SunTrust Banks Inc (STI): 2.89%
  5. Popular Inc (BPOP): 2.87%
  6. Associated Banc-Corp (ASBC): 2.82%
  7. East West Bancorp Inc (EWBC): 2.77%
  8. BB&T Corp (BBT): 2.76%
  9. Hudson City Bancorp, Inc. (HCBK): 2.74%
  10. JPMorgan Chase & Co (JPM): 2.72%

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