Will Financial ETFs Ride M&A Wave Higher?

by on November 16, 2009 | ETFs Mentioned:

Over the past few weeks, there has been a resurgence in acquisition activity, fueling an already strong market rally. This news has spanned all regions of the economy ranging from the transportation sector (Burlington Northern being taken over by Berkshire Hathaway) to pharmaceuticals (Schering Plough being acquired by Merck). Most recently, in the consumer sector, Kraft announced its intention to take over confectionery giant Cadbury while Hewlett Packard announced plans to buy 3com. While the deals almost always push up the stock price of the company being acquired, the M&A activity is a welcome development for the investment banking industry, which is still suffering from the hangover of the financial crisis of 2007 and 2008. Investment banks have received nearly $4 billion in revenue from these transactions in 2009, and should this consolidation trend continue, it could be very good news for the entire financial sector.

While most financial ETFs have a weighting towards investment banks, some have a much bigger allocation than others. These four ETFs highlighted below have a significant weighting towards the major investment banks that could benefit from an uptick in M&A activity, including Goldman Sachs, JP Morgan, Morgan Stanley, Citi, and Bank of America Merrill Lynch, which take up the top five spots in the M&A financial advisory category.

  • SPDR Select Sector Fund – Financials (XLF): This ETF has a dividend yield of 2.7% and holdings in 79 different companies. The focus of this fund is giant and large cap firms, which make up more than 80% of the holdings, giving XLF an average market cap of $36 billion .


  • Vanguard Financials ETF (VFH): Vanguard’s Financial ETF also has a strong weighting towards large caps, but also invests nearly one quarter of total assets in mid cap securities. This ETF offers the most depth of holdings, with more than 500 individual securities. VFH pays a dividend of 2.5% and maintains a low expense ratio of just 25 basis points.


  • iShares Dow Jones U.S. Financial Sector (IYF): This ETF is also spread out among large and mid caps, and it has over 250 securities in the portfolio, although 43% of the fund is in the top ten holdings.


  • iShares Dow Jones U.S. Financial Services (IYG): Despite this ETF’s large number of holdings (over 100) almost two thirds of the fund is in its top ten holdings, including JP Morgan, Bank of America, and Wells Fargo. The fund pays a modest dividend yield and is skewed large caps, which comprise nearly 60% of the fund.



As presented in the chart below, there are a few small differences between the holdings of these ETFs and their allocations to each of the major investment banks. IYG holds nearly three times as much in Citi as VFH does, and IYG maintains a larger weighting in both Bank of America and JP Morgan as well. In fact, IYG holds the highest percentage in four of the five banks, with only its weighting in Goldman Sachs being edged out by the weighting in XLF. Meanwhile, VFH is the most diversified with the smallest holdings in four of the five banks with once again Goldman being the outlier.

XLF 10.3% 4.4% 6.6% 12.1% 3.0%
VFH 8.1% 2.2% 4.9% 9.1% 2.1%
IYF 8.2% 4.1% 4.5% 9.7% 2.2%
IYG 12.1% 6.1% 6.6% 14.2% 3.2%

For more ETF ideas make sure to sign up for our free ETF Newsletter.

Disclosure: No positions at time of writing.