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I’ve had great success with sector-based exchange traded funds (ETFs) over the years. And that’s because — despite whatever problems the broader stock market may be having — usually one or more niches are still doing well.
This year one of the leading niches has been financial services. That definitely wasn’t the case last year at this time, when many banks were teetering on the edge of failure. They survived (most of them, anyway) thanks only to government bailouts.
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Now stocks from this sector are zooming higher! In fact, the S&P 500 Financial Index jumped 153 percent from its March 6 low through October 12.
Will the financial rally continue? Not forever — the banks still have a lot of problems, and the Fed can’t keep rescuing them indefinitely. Even so, with many of these stocks still 50 percent or more below their 2007 peak, there’s plenty of profit potential left for you.
And if you’re interested in playing this uptrend, you can pick from a nice selection of ETFs. In fact, there are currently 34 ETFs that focus on the financial sector. Here are a few you may want to consider. Some are very diversified, while others are more specialized.
These Broad-Based ETFs
Cover the Entire Financial Sector
The lines between the different kinds of financial services firms are mighty fuzzy these days. Huge conglomerates like Bank of America (BAC) and JPMorgan Chase (JPM) are involved in everything from banking … to stock underwriting … to life insurance.
If you want to own these leaders, plus a cross-section of smaller companies, consider one of these ETFs:
- SPDR Select Sector Financial (XLF)
- iShares Dow Jones U.S. Financial (IYF)
- Vanguard Financials ETF (VFH)
All of these funds have reasonable fees and good liquidity. XLF is focused exclusively on large-cap financial stocks. The other two own some smaller companies as well, but all three are well-diversified within the sector.
Unfortunately, these funds are missing some potentially great upside by not owning financial stocks from outside the U.S. For that reason, you might want to look at …
Global and International Financial ETFs
Asia and Europe have some colossal — and highly profitable — financial services stocks. But you usually won’t find them in U.S.-focused ETFs or mutual funds.
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| Asia is a financial powerhouse. |
If you want to be diversified, both geographically as well as within the industry, you need a global or international fund. (Note that these two words don’t mean the same thing. Global means “the whole world;” international means “the whole world except the U.S.”)
Right now there’s only one ETF that gives you the worldwide financial sector in one package: iShares S&P Global Financials (IXG). Several international funds cover the sector outside the U.S., though. A couple to look at are:
- WisdomTree International Financial (DRF)
- SPDR S&P International Financial (IPF)
Combine one of these funds with a good U.S. financials sector ETF (like the three named above) and you’ll have the financial world in your hands.
Don’t Forget About Niche Financials ETFs
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| ETFs let you focus on special niches of financial services. |
Now, what if you want to get more aggressive and zero in on particular parts of the financial sector? ETFs can help you there, too.
Financial services consist of three primary sub-sectors: Banking, insurance, and brokerage (sometimes called “capital markets”). You can get ETFs that are devoted to each of these niches …
- For banking firms, look at SPDR KBW Bank ETF (KBE), iShares Dow Jones U.S. Regional Banks (IAT), or PowerShares Dynamic Banking (PJB).
- For insurance companies, you can pick from iShares Dow Jones U.S. Insurance (IAK), SPDR KBW Insurance ETF (KIE), or PowerShares Dynamic Insurance (PIC).
- For brokerages, consider SPDR KBW Capital Markets ETF (KCE) or iShares Dow Jones U.S. Broker-Dealers (IAI). Additionally, there is Claymore/Beacon Global Exchanges, Brokers and Asset Managers (EXB) — which also wins the award for longest fund name in today’s column!
However, before jumping into any of these funds, be sure to check the average trading volume, as some of the niche products may have less-than-desirable liquidity.
But always remember: With ETFs, you can now build a financial sector portfolio that’s customized to your needs and preferences — not what some overpaid portfolio manager thinks you should have. The tools are available. All you have to do is use them!
Best wishes,
Ron
P.S. I’m now on Twitter. Please follow me at http://www.twitter.com/ron_rowland for frequent updates, personal insights and observations about the world of ETFs.
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