Bank of America Carrying Financial ETFs

NEW YORK ( TheStreet) -- Bank stocks have made a strong comeback in 2012 and financial ETFs are riding on the sector's coattails, with some funds experiencing strong inflows in recent weeks.

According to ETF Channel , financial ETFs have seen over $1.5 billion in inflows over the past week, of which $1.2 billion has flowed into the popular Financial Select Sector SPDR ( XLF) ETF.

Investors seeking an easy exposure to a diversified group of bank stocks and who want to trade in and out of shares quickly as markets switch from "risk on" to "risk off" clearly find these ETFs appealing.

Yet, the rally has been concentrated in a handful of bank stocks rather than in a diversified basket.

As KBW analyst Fred Cannon wrote in a note Tuesday, large-cap banks have outperformed the sector, with the KBW Bank Index gaining 26% year to date compared to the S&P Banks Select Industry Index, up 22.3%, with both topping the overall S&P Financial Select Sector Index (IXM) performance, which is up 20.96%.

Bank of America ( BAC) has led the rally in large-caps with its gain of 72%. So funds that have a large weighting to the stock have undoubtedly surged the most, explaining the divergence in performance between different financial ETFs.

The top three performers year-to-date include Market Vectors Bank and Brokerage ETF ( RKH), Revenue Share Financials ( RWW) and iShares Dow Jones U.S. Financial Services Fund ( IYG), all gaining 27% to 28% according to data compiled from Bloomberg.

All three ETFs counted the big four banks- Bank of America, JPMorgan Chase ( JPM), Citigroup ( C) and Wells Fargo ( WFC) among their top five holdings, according to data available at Morningstar.

They also notably had more concentrated exposures to the top five holdings compared to other ETFs. The RKH ETF for instance had 40% of its portfolio invested in the top five stocks that included the big four and HSBC ( HBC).

Of the three, RWW, which tracks the S&P 500 Financials, had the biggest exposure to Bank of America at 9.9% of the total portfolio.

The differences in composition between the indices also help to explain some of the divergence in performance.

The PowerShares KBW Bank Portfolio ( KBWB), which tracks the KBW Bank Index (BKX) has risen more than 25% in 2012.

In contrast, the S&P Bank Sector ETF ( KBE), which replicates the S&P Bank Index, has trailed with a return of 23%.

That may be due to the way the indices these funds track are constructed, according to KBW analysts. While the BKX is designed to capture the performance of 24 large-cap banks, with a higher weighting to the biggest banks, the S&P Bank Index is an equally- weighted basket of 50 bank stocks.

The Financial Select Sector SPDR Fund ( XLF) also appears to have underperformed, given its exposure to the S&P Financials Select Sector Index, which has trailed other indices.

KBW analysts recommend exposure to KBWB for investors who want an exposure to more large-cap stocks, because it offers a more focused exposure to stocks such as Bank of America and JPMorgan.

The analysts also note that with Bank of America being the big outperformer in the markets now, ETFs without a material weighting to the stock are likely to underperform.

--Written by Shanthi Bharatwaj in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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