2 ETFs Do Well Without Financial Stocks

NEW YORK ( TheStreet) -- Mohamed El-Erian has said that Europe is on the verge of a banking crisis. This is hardly a surprise as bad news for European, and UK banks has been playing out for years and has been getting worse for the last few months.

Readers of my articles at TheStreet and of my blog have probably grown weary of my droning on about how bad U.S. and European banks are. Operation twist will not help the U.S. banks as a flatter yield curve makes lending less profitable.

Anyone agreeing that most financial stocks stink can simply avoid those stocks or sector ETFs but not everyone is comfortable with individual stocks or narrow products. A user of broad-based funds using the SPDR S&P 500 Trust ( SPY) or the iShares MSCI EAFE Index Fund ( EFA) is going to get 13% and 22% respectively in financials. If financials continue to be the exact wrong place to be, then 13% and 22% are too much.

Fortunately for investors there are broad-based substitutes for these funds that exclude financial stocks. The WisdomTree Dividend ex-Financials ( DTN) can replace SPY and the WisdomTree International Dividend ex-Financials ( DOO) can replace EFA.

The domestic-oriented DTN is obviously dividend weighted. The largest sectors are staples and utilities at 15% each, telecom at 10%, discretionary 9%, industrials and health care 8% each and energy at 7%.

The WisdomTree Website reports a distribution yield of 3.04%. The trailing 12 months have actually been a little better but dividends from ETFs vary over time and the future dividend could be better or worse, there is no way to know. Avoiding financials has allowed DTN to outperform SPY by a noticeable amount over the last 12 months and year to date, 12% versus 6% and flat versus a decline of 6%

DOO allocates 18% to telecom, 11% to utilities, 9% each to industrials and staples, 8% each to health care and energy and 7% each to materials, tech and discretionary. At the country level DOO is heaviest in Australia 17%, France 11% and Japan 10% before getting smaller from there. The telecom sector and Australia are each big dividend payers which accounts for their large exposures in the fund. The trailing dividend yield for DOO is 4.7% but the same caveat about future dividends applies.

Thus far DOO has been helped only modestly by excluding financials; year to date it is down 10% versus 15% for EFA. Where I think this will become important is when European stocks start to recover and the other sectors leave the financials behind.

There are still some segments in the financial sector that are not in the obvious line of fire of the European banking crisis that El-Erian is calling for or largest U.S. banks which show no signs of fundamental recovery.

The segment getting most attention in this regard has been the Canadian banks, including Bank of Nova Scotia ( BNS), Royal Bank of Canada ( RY) and Toronto Dominion ( TD). I also believe that the Chilean banks like Santander de Chile ( SAN) and Banco de Chile ( BCH) will continue to do quite well. The yields from both Canadian and Chilean banks are quite generous and the balance sheets are healthier than most U.S. banks.

One other segment whose business model is intact is the publicly traded exchanges. There are many of them trading in the U.S. and foreign markets, why there is no ETF focusing on these is a mystery to me. NYSE Euronext ( NYX) yields a surprisingly high 4.3% and ASX Limited ( ASXFY), the Australian stock exchange, yields over 6%. Exchange stocks will not offer a place to hide in the face of a global bear market but increased trading volume is good for business which allows the fundamentals to remain healthy.
At the time of publication, Nusbaum said BNS and SAN were client holdings.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.

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