Our goal in this profile is to help investors wade through the many competing ETF offerings available. Using our long experience as an ETF publication, we can help select those ETFs that matter and may not be repetitive. The result is a more manageable list of issues from which to choose.

There are currently nearly 40 ETFs oriented to the financial sector. The following analysis features our top selections of ETFs. 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. Some believe the sector is on the mend but current data don't necessarily support this view. Uncertainty as to a positive resolution of these issues remains a drag on markets overall and this sector in particular.

There has never been a bull market when financials were not a participant in any overall rally. As a consequence, its important investors pay close attention to the behavior of the sector whether from general news and price action. Doing so would offer important clues as to market health and overall future conditions.

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.

We rank the top 10 ETF by our proprietary stars system as outlined below. If an ETF you're interested in is not included but you'd like to know a ranking send an inquiry to support@ETFDigest.com and we'll attempt to satisfy your interest.


Strong established linked index
Excellent consistent performance and index tracking
Low fee structure
Strong portfolio suitability
Excellent liquidity


Established linked index even if "enhanced"
Good performance or more volatile if "enhanced" index
Average to higher fee structure
Good portfolio suitability or more active management if "enhanced" index
Decent liquidity


Enhanced or seasoned index
Less consistent performance and more volatile
Fees higher than average
Portfolio suitability would need more active trading
Average to below average liquidity


Index is new
Issue is new and needs seasoning
Fees are high
Portfolio suitability also needs seasoning
Liquidity below average

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.

#1: SPDR Financial Select Sector ETF (XLF)

XLF tracks the overall S&P Financial Select Sector Index. The fund was launched in December 1998 and is the granddaddy of the sector. The expense ratio is .20%. AUM (Assets under Management) exceeds $4.2 billion and average daily trading volume is 117M shares. There are popular leveraged inverse/long ETFs available through ProShares, Direxion and options which may enhance daily trading volume. As of late November 2011the annual dividend yield was 1.71% and YTD performance for the same period -35.41% reflecting previously mentioned financial uncertainties. (Note the heavier weighting of BRK.B, WFC and JPM as index constituents.)

XLF Top Ten Holdings & Weightings

Data as of November, 2011
  1. Berkshire Hathaway Inc B (BRK.B): 8.55%
  2. Wells Fargo & Co (WFC): 8.54%
  3. JPMorgan Chase & Co (JPM): 8.45%
  4. Citigroup Inc (C): 5.75%
  5. Bank of America Corporation (BAC): 4.32%
  6. The Goldman Sachs Group Inc (GS): 3.45%
  7. American Express Co (AXP): 3.28%
  8. U.S. Bancorp (USB): 3.07%
  9. Simon Property Group Inc (SPG): 2.35%
  10. MetLife Inc (MET): 2.32%

#2: Vanguard Financials ETF (VFH)

VFH tracks the MSCI US Investable Market Financials 25/50 Index. The fund was launched in January 2004. The expense ratio is .25%. AUM equal $485M with average daily trading volume of less than 142K shares. As of late November 2011the annual dividend yield was 2.12% and YTD performance was -23.00%. The mix of constituent assets within the index primarily account for the difference in performance via XLF. This should put VFH atop the leader board but it's also understood component mix can vary and indeterminately affect performance.  

VFH Top Ten Holdings & Weightings

Data as of November, 2011
  1. JPMorgan Chase & Co (JPM): 7.08%
  2. Wells Fargo & Co (WFC): 6.09%
  3. Citigroup Inc (C): 5.25%
  4. Bank of America Corporation (BAC): 4.81%
  5. Berkshire Hathaway Inc B (BRK.B): 3.02%
  6. The Goldman Sachs Group Inc (GS): 2.86%
  7. American Express Co (AXP): 2.43%
  8. U.S. Bancorp (USB): 2.13%
  9. MetLife Inc (MET): 2.01%
  10. Simon Property Group Inc (SPG): 1.48%

#3: iShares Dow Jones U.S. Financial Sector Index ETF (IYF)

IYF tracks the index of the same name but is broader than just the banking sector. It was launched in May 2000. The expense ratio is higher than most at .48%. AUM exceeds $342M with average daily trading volume of 600K shares. As of late November 2011 the annual dividend yield was 1.75% with YTD performance of -22.00%. These three conclude those ETFs with comprehensive (catch-all) conventional indexes.

IYF Top Ten Holdings & Weightings

Data as of November, 2011
  1. JPMorgan Chase & Co (JPM): 6.71%
  2. Wells Fargo & Co (WFC): 6.39%
  3. Citigroup Inc (C): 4.53%
  4. Berkshire Hathaway Inc B (BRK.B): 3.71%
  5. Bank of America Corporation (BAC): 3.41%
  6. American Express Co (AXP): 2.67%
  7. U.S. Bancorp (USB): 2.42%
  8. Visa, Inc. (V): 2.41%
  9. The Goldman Sachs Group Inc (GS): 2.31%
  10. Simon Property Group Inc (SPG): 1.86%

#4: 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 $956 million and average daily trading volume is over 6.5M shares. (Note: Since June 2011 AUM has fallen 35% and volume has increased by nearly 50% indicating both lower constituent prices but also capital flight from the sector.) The expense ratio is .35%. As of late November 2011 the annual dividend yield was 1.48.79% while YTD performance is -31.00%. There are some developing inverse and leveraged long/short issues becoming available for the sector.

KBE Top Ten Holdings & Weightings

Data as of November, 2011
  1. East West Bancorp Inc (EWBC): 3.01%
  2. Fifth Third Bancorp (FITB): 2.94%
  3. Citigroup Inc (C): 2.83%
  4. U.S. Bancorp (USB): 2.79%
  5. PNC Financial Services Group Inc (PNC): 2.78%
  6. KeyCorp (KEY): 2.77%
  7. Comerica Inc (CMA): 2.75%
  8. Northern Trust Corporation (NTRS): 2.73%
  9. Hudson City Bancorp, Inc. (HCBK): 2.71%
  10. TCF Financial Corporation (TCB): 2.71%

#5: 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 $491 million while average daily trading volume is a high 2.9 million shares. The high volume means more speculation within the sector given more options trading and the employment of long/short strategies. As of late November 2011the annual dividend yield was roughly 1.80% with YTD performance -18.01%.

KRE Top Ten Holdings & Weightings

Data as of November, 2011
  1. PrivateBancorp Inc (PVTB): 2.18%
  2. Umpqua Holdings Corporation (UMPQ): 2.08%
  3. East West Bancorp Inc (EWBC): 2.05%
  4. Webster Financial Corp (WBS): 2.03%
  5. Firstmerit Corp (FMER): 2.01%
  6. Fifth Third Bancorp (FITB): 1.99%
  7. F.N.B. Corporation (FNB): 1.98%
  8. Susquehanna Bancshares Inc (SUSQ): 1.96%
  9. Iberiabank Corp (IBKC): 1.89%
  10. PNC Financial Services Group Inc (PNC): 1.89%

#6: SPDR S&P Insurance ETF (KIE)

KIE tracks the KBW Insurance Index which is a float adjusted market-modified-market capitalization-weighted index. Beyond that being a mouthful, includes personal and commercial insurance, property/casualty insurance, life insurance, reinsurance, insurance brokerage and financial guarantee. The index is much more targeted away from some credit risk associated with banks and brokers but still has ill-defined exposure to it. The fund was launched in November 2005. AUM equal $114M and average daily trading volume is 360K shares. The expense ratio is .35%. As of late November 2011 the annual dividend yield was 2.14% and YTD return is -20.80%.

 

KIE Top Ten Holdings & Weightings

Data as of November, 2011
  1. The Travelers Companies, Inc. (TRV): 9.44%
  2. MetLife Inc (MET): 8.03%
  3. Chubb Corp (CB): 7.95%
  4. Prudential Financial Inc (PRU): 7.05%
  5. Aflac Inc (AFL): 6.23%
  6. Unum Group (UNM): 4.39%
  7. Ameriprise Financial Inc (AMP): 4.27%
  8. Principal Financial Group (PFG): 4.24%
  9. XL Group PLC (XL): 4.17%
  10. Progressive Corporation (PGR): 4.11%

#7: 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. (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.) The fund was launched in May 2007.  The expense ratio is .70%. AUM is currently near $74M while average daily trading volume is near 69K shares. As of late November 2011 the annual dividend yield was 2.69% and YTD return -15.70%. (Note: the performance indicates a good return in both up and down market environments over this period.)

 

FXO Top Ten Holdings & Weightings

Data as of November, 2011
  1. Arch Capital Group Ltd (ACGL): 1.42%
  2. Alliance Data Systems Corporation (ADS): 1.37%
  3. Fidelity National Financial Inc. (FNF): 1.34%
  4. Chubb Corp (CB): 1.33%
  5. Allied World Assurance Company Holdings AG (AWH): 1.29%
  6. ACE Ltd (ACE): 1.28%
  7. NASDAQ OMX Group, Inc. (NDAQ): 1.27%
  8. American Financial Group Inc (AFG): 1.21%
  9. Discover Financial Services (DFS): 1.19%
  10. Ares Capital Corporation BDC (ARCC): 1.19%

 

 

#8: 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. (Note: as with FXO we believe you should also consider more active position management strategies with these funds.) The fund was launched October 2006. The expense ratio is .60%. AUM equal $17 million and average daily trading volume is 7K shares. (Note: AUM is less than $25M which generally is the threshold for a successful fund with good liquidity.) As of late November 2011 the annual dividend yield was 1.6% and YTD return -13.5%. (Note: Despite low AUM low volume the returns overall have been relatively better, merit close monitoring and your consideration.)

PFI Top Ten Holdings & Weightings

Data as of November, 2011
  1. U.S. Bancorp (USB): 2.79%
  2. Moody's Corporation (MCO): 2.72%
  3. Chubb Corp (CB): 2.69%
  4. Aflac Inc (AFL): 2.62%
  5. Prudential Financial Inc (PRU): 2.62%
  6. ACE Ltd (ACE): 2.58%
  7. Principal Financial Group (PFG): 2.55%
  8. M&T Bank Corp (MTB): 2.50%
  9. Discover Financial Services (DFS): 2.47%
  10. American Express Co (AXP): 2.46%

 

#9: SPDR S&P Capital Markets ETF (KCE)

KCE tracks the KBW Capital Markets Index which consists of firms which we would commonly refer to as brokers and investments banks. The fund was launched in November 2005. The expense ratio is .35%. AUM is low at $24M which may in part be due to industry consolidation where brokers became banks. Average daily trading volume is around 53K shares. As of late November 2011 the annual dividend yield was 2.70% and YTD return was -32.20%.

An alternative choice would be IAI (iShares Dow Jones U.S. Broker-Dealer ETF) which has similar features and results to KCE but with a higher fee at .48%.

KCE Top Ten Holdings & Weightings

Data as of November, 2011
  1. State Street Corp (STT): 7.76%
  2. Franklin Resources (BEN): 7.71%
  3. Morgan Stanley (MS): 7.46%
  4. CME Group, Inc. A (CME): 7.15%
  5. The Goldman Sachs Group Inc (GS): 6.10%
  6. Raymond James Financial, Inc. (RJF): 4.76%
  7. TD Ameritrade Holding Corporation (AMTD): 4.42%
  8. IntercontinentalExchange, Inc. (ICE): 4.28%
  9. Charles Schwab Corp (SCHW): 4.17%
  10. Invesco Ltd. (IVZ): 4.13%

#10: PowerShares Global Listed Private Equity ETF (PSP)

PSP tracks the Global Listed Private Equity Index. This is a much more unique or niche area of the financial sector including global private banks, investment companies, venture capitalists, brokers and others. These consist of between 40-60 publicly listed companies whose principal business is to invest in and lend capital to privately held companies or what some would term "merchant banking". The expense ratio is .60% which is higher than the group but is a more specialized ETF. AUM exceeds $262M and averaged daily trading volume is roughly 309K shares. As of late November 2011 the annual dividend yield (including one-time factors such as return of principal and so forth) was 13.28% and YTD return -26.70%.

PSP Top Ten Holdings & Weightings

Data as of November, 2011
  1. Ratos AB (RATO B): 4.62%
  2. Leucadia National Corporation (LUK): 4.51%
  3. Hal Trust (HAL): 4.45%
  4. Blackstone Group LP (BX): 4.19%
  5. Onex Corp Subordinate Voting Share (OCX): 4.18%
  6. Partners Group Holding (PGHN): 3.66%
  7. 3i Group (III): 3.60%
  8. Wendel Investissement (MF): 3.41%
  9. Ares Capital Corporation BDC (ARCC): 3.41%
  10. Eurazeo Common Stock (EUZOF): 3.27%

 

It's also important to remember that ETF sponsors have their own competitive business interests when issuing products which may not necessarily align with your investment needs. New ETFs from highly regarded and substantial new providers are also being issued. These may include Charles Schwab's ETFs and Scottrade's Focus Shares which both are issuing new ETFs with low expense ratios and commission free trading at their respective firms. These may also become popular as they become seasoned. 

For further information about portfolio structures using technical indicators like DeMark and other indicators, take a free 14-day trial at ETF Digest . Follow us on Twitter and Facebook as well and join our group conversations.

You may address any feedback to: feedback@etfdigest.com   

The ETF Digest has no current positions in the featured ETFs.

More from ETF Digest

(Source for data is from ETF sponsors and various ETF data providers)

 
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

Dave Fry is founder and publisher of ETF Digest, Dave's Daily blog and the best-selling book author of Create Your Own ETF Hedge Fund, A DIY Strategy for Private Wealth Management, published by Wiley Finance in 2008. A detailed bio is here: Dave Fry.

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