Financial ETFs: Seven Ways To Play

by on March 19, 2010

The financial sector was one of the hardest areas of the economy in 2008 and early 2009, as years of excessive risk taking finally resulted in a meltdown that spurred several unprecedented emergency measures and set off one of the worst recessions in a generation. Since bottoming out last March, however, financials have surged higher, leading the way during the recovery effort (see the Top Ten ETF Performers Since The Market Bottom). While many financial ETFs remain well below pre-recession highs, they have reclaimed significant chunks of the ground lost in the last 13 months.

As the ETF industry has continued to expand, options for gaining exposure to the financial sector have multiplied. According to the ETF screener, there are currently 33 non-leveraged, non-inverse ETF options that offer exposure to the financial sector. These funds include both ETFs targeting specific financial sub-industries (such as regional banks and broker-dealers) as well as more broad-based funds. While investors seeking exposure to the financial industry have historically gravitated towards funds focusing on U.S. stocks, more and more are seeking out ETFs focusing on other parts of the world.

Below, we profile seven ETFs that all offer exposure to the financial sector, but maintain very unique risk and return profiles (for more ETF investment ideas, sign up for our free ETF newsletter).

Financial ETFs
Region Ticker YTD Gain
U.S. XLF 9.6%
World IXG 3.5%
World ex-U.S. AXFN n/a
Emerging Markets EFN 1.7%
China CHIX -2.0%
Europe EUFN n/a
Far East FEFN n/a

Financial Select Sector SPDR (XLF)

XLF is the largest and most heavily traded financial ETF, with total assets of more than $6 billion. XLF is linked to the Financial Select Sector Index, a benchmark that includes banks, insurance firms, and diversified financial services providers. XLF’s holdings read like a Who’s Who of Wall Street; JP Morgan, Bank of America, Wells Fargo, Goldman Sachs, and Citigroup in aggregate account for about 39% of total assets. XLF is currently up about 10% on the year, making it one of the top-performing sector SPDRs.

S&P Global Financials Index Fund (IXG)

For investors looking to establish exposure to the global financial industry, IXG may be an interesting option. This fund is designed to track the performance of the S&P Global Financials Sector Index, a benchmark that includes major banks, insurance companies, real estate firms, and securities brokers. Although the scope of IXG is global, it maintains a heavy tilt towards U.S. stocks, which account for about 36% of assets. After the U.S., the largest country allocations are to the UK (10%), Australia (8%), and Canada (7%).

IXG’s largest holding, HSBC, isn’t found in the Financial SPDR, but there is some significant overlap. JP Morgan, Bank of America, Wells Fargo, Berkshire Hathaway, Goldman Sachs, and Citi are all found in the top ten of both funds.

MSCI ACWI ex-U.S. Financials Sector Index Fund (AXFN)

As noted above, IXG maintains significant exposure to U.S. companies. For investors looking for financial exposure that avoids U.S. stocks altogether, AXFN is one option. This fund seeks to replicate the performance of the MSCI All Country World ex USA Financials Index, a benchmark that excludes U.S. stocks.

AXFN’s depth and breadth of exposure is impressive; this fund holds about 260 stocks from more than 35 countries, including both developed and emerging economies. The largest weights go to the UK, Australia, Canada, and Japan. AXFN is up about 8% since its inception in January.

Dow Jones Emerging Markets Financials Titans Index Fund (EFN)

For investors looking to make a play on the financial sector in developing economies, EFN may be the way to go. This ETF tracks the performance of the Dow Jones Emerging Markets Financials Titans Index, a benchmark that includes banks, insurance companies, and REITs in about eight emerging markets. Emerging markets financials present an interesting investment case because of the unique demographic trends in the developing world. Ongoing urbanization and a swelling middle class has created a rapidly-expanding customer base and growing demand for financing of “big ticket” purchases.

iShares also offers an option for exposure to emerging markets financials, the MSCI Emerging Markets Financials Sector Index Fund (EMFN). But these two ETFs aren’t as similar as their names might suggest, due to fundamental differences in the underlying indexes. Dow Jones emerging markets benchmark exclude “quasi-developed” markets like Taiwan, South Korea , and Israel; these three markets account for more than 20% of EMFN’s holdings (read more about the differences between these economies in this article from Index Universe).

Global X China Financial ETF (CHIX)

Whereas EFN offers exposure to a handful of emerging markets, CHIX focuses only on Chinese banks and financial institutions. This ETF tracks the performance of the S-BOX China Financials Index, a benchmark that includes about 25 banks, insurance companies, and real estate trusts. Major holdings in CHIX include ICBC (9.7%), China Construction Bank (9.4%), and Bank of China (9.0%); these banks are three of the largest financial institutions in the world.

CHIX has been incredibly active in 2010 as investors have carefully scrutinized any statement from Beijing that may shed light on upcoming policy decisions. The fund is down about 2% on the year.

MSCI Europe Financials Sector Index Fund (EUFN)

iShares recently launched a handful of ETFs targeting international financial sectors, including EUFN. This ETF tracks the MSCI Europe Financials Sector Index, a benchmark that consists of major European banks. Major holdings include several institutions with a major U.S. presence, such as HSBC, Barclays, Credit Suisse, and UBS.

EUFN focuses on developed economies in Europe giving the largest weightings to the UK, Spain, France, and Switzerland. In total, EUFN maintains exposure to about 100 financial firms in 15 different countries (Greek banks account for less than 3% of assets). EUFN could see some significant investor interest in coming months as Europe’s financial status continues to develop and the viability of austerity plans implemented to avoid a financial meltdown become more clear.

MSCI Far East Financials Sector Index Fund (FEFN)

This ETF is linked to the MSCI Far East Financials Index, a benchmark that measures the performance of the financial sector in the Far East region. Like most Asia Pacific ETFs, FEFN has a heavy tilt towards Japan, which makes up about 63% of fund holdings. The remaining exposure is divided between Hong Kong and Singapore.

FEFN is a relatively new fund, having launched in January 2010.

Disclosure: No positions at time of writing.