Beyond XLF: Five Alternatives To The Popular Financial ETF

by on May 11, 2010 | ETFs Mentioned:

Over the past two years, the financial sector has seen more than its fair share of ups and downs. After being pushed to the brink of complete collapse after the Lehman Brothers bankruptcy, financials recovered to reclaim big chunks of the ground lost and finish 2009 as one of the year’s best performers. The financial sector has been back in focus in recent weeks as the government brought fraud charges against Goldman Sachs and lawmakers in Washington have been scrambling to push through a comprehensive regulatory overhaul.

The enduring volatility of this sector has done little to diminish its appeal to investors. While those with a long-term focus may have shied away from financials, the increased volatility has attracted more active investors who measure their holdings periods in hours and days, not years. By far the most popular ETF in the Financial Equity ETFdb Category Financial Select Sector SPDR (XLF), which has amassed nearly $7 billion in assets under management and trades on average nearly 120 million shares daily.

Number of Holdings: 81
YTD Performance: 10.2%
Largest Holdings: Bank of America (10.3%), J.P. Morgan Chase (10.2%), Wells Fargo (9.2%)
Expense Ratio: 0.21%
Assets: $6.8 Billion

But options for exposure to the financial sector go far beyond XLF; there are now ETFs offering targeted exposure to various sub-sectors of the financial industry. Below we have highlighted five alternative choices that may offer a compelling option to investors:

1. First Trust NASDAQ ABA Community Bank Index Fund (QABA)

This fund is also one of the newer products to the financials arena, launching less than a year ago. This ETF focuses on a smaller segment of banks, avoiding exposure to the well-known Wall Street firms by targeting about 90 NASDAQ-listed community banks across the country. QABA tracks the NASDAQ OMX ABA Community Bank Index, a market capitalization-weighted benchmark that includes all NASDAQ listed banks and thrifts, excluding the 50 largest banks based on asset size. QABA also avoids banks that maintain an “international specialization” or a “credit-card specialization,” thereby providing exposure to a unique group of stocks.

Number of Holdings: 90
YTD Performance: 17.6%
Largest Holdings: People’s United Financial (7.2%), TFS Financial (4.6%), BOK Financial (4.0%)
Expense Ratio: 0.60%
Assets: $9 million

2. SPDR KBW Regional Banking ETF (KRE)

KRE offers exposure to regional banks, tracking the KBW Regional Banking Index. This benchmark reflects the performance of publicly traded companies that do business as regional banks or thrifts. It is an equal-weighted index, meaning that KRE avoids concentrating assets in a few big names (XLF, for example, allocated about 57% of assets to its top ten holdings). The index underlying KRE consists of regional banks and thrifts listed on U.S. exchanges. As such, the components of this ETF generally aren’t involved in complex derivatives, focusing instead on traditional lending activities. KRE has seen its popularity increase; it now has nearly $1 billion in assets and an average volume of 4.5 million shares a day (see more fundamentals of KRE).

Number of Holdings: 52
YTD Performance: 24.1%
Largest Holdings: First Midwest Bancorp (2.8%), Webster Financial (2.7%), Whitney Holding (2.7%)
Expense Ratio: 0.35%
Assets: $960 MM

3. PowerShares S&P SmallCap Financials Portfolio (XLFS)

Last month PowerShares introduced a line of small cap sector funds, offering a unique alternative to the sector SPDRs. XLFS seeks to replicate the S&P SmallCap 600 Financials Index, a benchmark comprised financial service companies that are principally engaged in the business of providing services and products, including banking, investment services, insurance and real estate finance services.

Similar to the ETFs profiled above, XLFS isn’t heavy on Wall Street giants; its components consist of smaller financial services companies.

Number of Holdings: 99
YTD / 52 WK Performance: 1.9% / 1.9%
Largest Holdings: National Retail Properties (2.4%), ProAssurance (2.3%), Entertainment Properties Trust (2.2%)
Expense Ratio: 0.29%
Assets: $3 million

4. iShares Dow Jones U.S. Insurance Index Fund (IAK)

IAK offers exposure to the Dow Jones U.S. Select Insurance Index, a benchmark that measures the performance of the insurance sector of the U.S. equity market. IAK includes a variety of insurance companies, including insurance brokers, property and casualty insurance, reinsurance, and life insurance companies. Property and Casualty (46%) and Life Insurance (41%) account for majority of IAK’s exposure.

Most investors don’t immediately think of insurance companies when considering an investment in the financial sector. While insurance companies are impacted by many of the same factors as big banks, there are a number of unique performance drivers as well.

Number of Holdings: 61
YTD Performance: 11.8%
Largest Holdings: Travelers Companies (9.7%), Prudential Financial (8.3%), Aflac (7.9%)
Expense Ratio: 0.48%
Assets: $83 million

5.  Claymore/Beacon Global Exchanges, Brokers, and Asset Managers Index Fund (EXB)

This ETF offers exposure to another unique group of financial firms. EXB tracks the Beacon Global Exchanges, Brokers & Asset Managers Index, a benchmark comprised of approximately 100 equity securities traded on global exchanges that operate security exchanges or brokerage/asset management firm as a primary business. Again, these businesses are impacted by some of the same factors driving Wall Street banks, but will be affected by a number of unique factors as well.

EXH maintains a significant chunk of international exposure; non-U.S. stocks account for about 36% of assets. The biggest international allocations are made to Japan and Hong Kong, with a handful of European countries also receiving a moderate weighting. For more information, make sure to read Broker-Dealers: The Best Financial ETFs?

Number of Holdings: 101
YTD  Performance: -1.4%
Largest Holdings: Bank of New York Mellon (5.6%), Charles Schwab (5.3%), Goldman Sachs (5.1%)
Expense Ratio: 0.65%
Assets: $3 million

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Seth Dowling contributed to this article.

Disclosure: No positions at time of writing.