As a majority of the companies finish reporting their
quarterly financial results, it becomes a known fact that they
have had a tough time increasing or even maintaining their
revenues although profits more or less seem to be well aligned
with market expectations.
While financial sector earnings have not been as good as in
some of the previous quarters, the drag has mainly been a result
of tough comparisons. Nevertheless, the financial sector has been
delivering a decent earnings and revenue growth. Some of
the noteworthy reasons are - marked decrease in provisioning for
losses for banks and increasing fees for investment management
Mutual Funds and
have witnessed massive inflows and increased trading activities
facilitated by a surging equity market, which have increased the
brokerage fees for brokerage firms (see
Are Low Volatility ETFs Capable of Big Gains?
The impressive increase in earnings over the past few quarters
has caused many of the companies from the financial sector to
announce an increase in their dividends. Not only will this make
financial stocks more attractive but it will also quench the
dividend thirst for income seeking investors.
For investors seeking an exchange traded fund route to play
the dividend paying financial equities the
Powershares KBW High Dividend Yield Financial ETF
would be an interesting choice.
KBWD was launched in December of 2010 and since then has been
able to amass an asset base of around $244 million. The ETF
follows a unique investment strategy and weighs its components,
comprising of financial stocks, on the basis of their dividend
Its portfolio comprises of approximately 37 stocks with just
about 46% of its total assets invested in the top 10 holdings.
One other noteworthy fact for KBWD is that it is mostly exposed
to mid and small cap stocks as opposed to other mainstream
financial sector ETFs which bet on the large cap ones.
At the first instance it might appear that a mid and small cap
focused ETF might be more volatile compared to an ETF which
concentrates on large caps, however this is not the case with
KBWD. In fact KBWD has a three year annualized volatility of just
18.04%. Compared to this the Financial Select Sector SPDR (XLF)
has a three year annualized standard deviation of 25.06% (see
Time to Buy This Low Risk Retail ETF?
This is primarily due to the fact that KBWD does not focus
primarily on growth oriented stocks contrary to its financial
sector counterpart XLF. Also, accounting for its relative capital
market stability is the fact that it has a predominant exposure
to dividend paying stocks which have low historical volatility
Still, by no means does it imply that the ETF lags behind its
other growth oriented counterparts. In fact a comparison of KBWD
and XLF over a period of 3 years reveals that the dividend
focused ETF has pretty much always been ahead of the growth
oriented one as far as total returns are concerned (read
What Does Your Income ETF Focus On?
The following chart reveals the cumulative total returns
between the two financial ETFs since the inception of KBWD back
in December of 2010.
Chart 1: Comparative Total Returns Analysis
Notice how KBWD returns line has mostly been above the XLF
returns line. Within this time frame, KBWD has returned almost
33% compared to XLF which returned 23.50%.
Thus, it is witnessed that even for a high volatility sector
such as the financial sector, the low volatility ETF has
outperformed the high volatility ETF in a slightly longer term
The dividend yield for KBWD stands at an astounding 7.61%, but
sadly investors have to pay a huge premium for the ETF in the
form of the expense ratio which stands at 148 basis points. This
is without doubt one of the most important factors which could
restrict investors from owning this ETF.
In the current low rate environment , any investment avenue
which yields more than the benchmark rates is considered to be an
attractive option. Considering this backdrop, KBWD fits the bill
like no other ETF. However, investors have for long abstained
from investing in financial stocks for dividends primarily due to
the higher volatility attached with them (see
Healthcare ETF in Focus on Earnings Reports
However, we have already seen the risk-return tradeoff for
this exciting ETF, which is pretty much in alignment with the
risk tolerance of an income seeking investor. Moreover, with most
of the financial companies increasing the dividends, now
might well be the time to gain exposure in this exciting
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PWRSH-K HDY FP (KBWD): ETF Research Reports
SPDR-FINL SELS (XLF): ETF Research Reports
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