Nonfinancial ETF Beats the S&P 500

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( ETF Expert) -- Just a few trading sessions ago, PowerShares QQQ Trust 1 ( QQQ) hit a multiyear high. So did iShares Morningstar Large-Cap Growth ( JKE).

It's not that the markets were ignoring the debt deadlock. SPDR Gold Shares ( GLD) and CurrencyShares Swiss Franc ( FXF) were registering records as well.

It was that summertime traders were taking a barbell approach to risk allocation, loading up on "fear" and "high beta." Simultaneously, they began dumping dividend ETFs in the middle of the continuum.

Three days later, even the right side of the barbell was demonstrating vulnerability. And it was sure to sell off even more if the weekend didn't produce a viable solution.

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The credit collapse of 2008 was supposed to be a once-in-a-lifetime cataclysm. Yet the European debt crisis became a topic of debate in late 2009, hampering financial stocks in 2010 when investors questioned global financial company exposure to sovereign debt. Here in 2011, the possibility of a U.S. debt downgrade hit the financial sector yet again, because these are the institutions that may suffer the most from a lower rating on U.S. treasuries.

Indeed, the two-year performance for SPDR Financials ( XLF) is weak when compared to the broad market S&P 500 SPDR Trust ( SPY). The sector looks even bleaker when evaluated against high-beta cyclical peers like SPDR S&P Energy ( XLE) or Vanguard Information Technology ( VGT).

The solution may seem easy. Just invest in an ETF basket that excludes financials, right?

Investors do have the WisdomTree Dividend Ex-Financials Fund ( DTN). With a beta of 1.0, it has outperformed the S&P 500 SPDR Trust on a risk-adjusted basis over the same two-year period. And DTN has a distribution yield of 2.9% that is every bit as attractive as the "soon-to-be-rerated" 10-year Treasury bond.

On the flip side, the ex-financials concept does have its complications. DTN is dominated by the noncyclical segments of the U.S. economy. The top three sectors are utilities (18%), staples (15%) and health care (11%). If you're expecting U.S. economy to pull out of its "soft patch" and reaccelerate in future quarters, DTN may not provide juice.

The WisdomTree Dividend Ex-Financials Fund does have $400 million in assets, and it does average more than $250,000 in trading volume. That may be enough for sufficient liquidity under normal trading circumstances. In other words, when the markets are functioning properly, you can expect to execute a buy order or a sell order with little complication.

Are these normal trading circumstances, though? One more congressional hiccup and you can forget about a reasonable bid-ask spread with DTN; favorable price execution may not be in the cards for fans of stop-limit sell orders.

Problems aside, one might be inclined to pair DTN with a cyclical sector fund like Select Sector Industrial SPDR ( XLI) or the Select Sector Energy SPDR ( XLE). The combination could get you out of the sinkhole that defines financials these days. It's just a thought.

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Disclosure Statement: ETF Expert is a website that makes the world of ETFs easier to understand. Gary Gordon, Pacific Park Financial and/or its clients may hold positions in ETFs, mutual funds and investment assets mentioned. The commentary does not constitute individualized investment advice. The opinions offered are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert at the site.

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