ETFs Without the Financial Headache

Prescott, AZ ( TheStreet) -- Even before the U.S. stock market made its probable bottom in March 2009 many pundits have been trying to figure out the low point in financial stocks.

News for the group continues to be bad, with the recent trading loss at J.P. Morgan Chase ( JPM) being the latest. Things appear to be even worse for European financial stocks.

This creates a problem for investors who prefer to use broad-based ETFs that track indexes like the Standard & Poor's 500 or the MSCI EAFE Index. Fund provider WisdomTree was early to recognize this dilemma by offering the WisdomTree Dividend ex-Financials Fund ( DTN), which is a domestic fund, and the WisdomTree International Dividend ex-Financials Fund ( DOO).

In looking under the hood at DTN the dividend weighting methodology nets a reasonably even distribution at the sector level so an implosion in one sector, like technology 12 years ago or financials four years ago, would not necessarily cause DTN to melt down. The largest sector is utilities at 14%, staples at 13% and materials, industrials and telecom all near 11%. Energy is the smallest sector at 8%.

Excluding financials has led to clear outperformance by DTN thus far over the SPDR S&P 500 ETF ( SPY), which is the exchange-traded proxy for the S&P 500. In the last two years the domestic fund is up 24% versus a 19% gain for SPY.

The sector dispersion is a little wider with the international fund, which allocates 17% to telecom and 12% each to utilities, healthcare and staples. The smallest sector is tech at 6%.

As this is a foreign fund and Europe is the center of attention it is also important to look at the country weightings and understand that exposure. DOO's largest country weight is the UK at 22% followed by Australia at 17%. France is the third-largest country in the fund at 10%. The weighting of the eurozone totals just under 38%, which does not compare favorably to the iShares MSCI EAFE Index Fund ( EFA), which is closer to 24%. The Wisdom Tree international fund does fare better for investors looking to underweight Japan. DOO allocates 9.75% to Japan versus 21.4% for EFA.

Looking back over the last two years the sector weighting has not helped DOO versus EFA as it is down 1% versus a gain of 5% for EFA.

DTN has a distribution (trailing) yield of 3.45% versus 2% for SPY. DOO shows a distribution yield of 2.99% versus a trailing yield of 3.6% for EFA.

The concept of excluding the financial sector seems to have worked far better for domestic stocks than for foreign. In the case of DOO it is a dividend-weighted fund that based on information on the WisdomTree website yields less than the market cap-weighted EFA. Going forward this could change as could the yields for any of the funds, but the case for DOO looks weak for now. The reason for the lag to the iShares fund might not be attributable to the exclusion of financial stocks but due to the very heavy weighting to Europe.

This underscores the need to look under the hood and get the entire picture before buying a fund. The domestic fund has been working out as well as investors would probably hope but the international fund has had a more challenging go of things.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.