Even though a threat of yet another widespread global recession
has been lurking in the economy, financial stocks have proven to be
a solid bet for investors so far this year (read
Five Best Performing ETFs (So Far) in 2012
After a forgettable performance in the last fiscal year, the
sector has been one of the major contributors behind the broad
market rally. Despite this fact, valuations for many remain at
attractive levels suggesting that there could be room for further
Also, the implementation of quantitative easing 3 (QE3), is
expected to give the sector a nice boost by working to restore
demand in the economy. This coupled with the continuation of
Operation Twist is expected to push down interest rates, thereby
further reducing borrowing costs and enhancing credit growth (read
Commodity ETFs in Focus as Fed Unleashes QE3
Having said this, it is also prudent to note that the financial
sector is one of the most volatile sectors; therefore a broad based
pure play in the sector could go a long way in making the
risk-return tradeoff more lucrative for investors. Thus, top ranked
Exchange traded funds (ETFs) from the financial sector could be the
appropriate bet for investors seeking exposure in this sector.
About the Zacks ETF Rank
A look at top ranked Financial ETFs can be done by using the
Zacks ETF Rank. This technique provides a recommendation for the
ETF in the context of our outlook of the underlying industry,
sector, style box, or asset class. Our proprietary methodology also
takes into account the risk preferences of investors as well.
The aim of our models is to select the best ETFs within each
risk category. We assign each ETF one of five ranks within each
risk bucket. Thus, Zacks Rank reflects the expected return of an
ETF relative to other ETFs with similar level of risk.
Using this strategy, we have found one ETF which is Ranked 1 or
'Strong Buy' with this model in the financial sector which we have
highlighted in greater detail below:
Guggenheim S&P 500 Equal Weight Financial ETF
Launched in November of 2006, RYF tracks the S&P Equal
Weight Financials Index. The index includes stocks of those
companies which comprise the Financial sector of the S&P 500
Index. However, as opposed to their market capitalization weighing
methodology in the S&P 500 index, the components are weighed
equally in the S&P Equal Weight Financials Index.
The ETF has an asset base of just $14.11 million, which can be
considered low given the fact that the fund has been in
existence for around six years. Although the ETF is passive, the
fund charges an expense ratio of 50 basis points per year. This can
be considered a bit skewed towards the high side especially
considering the cheaper options out there (see
Does Your Portfolio Need a Financial ETF?
Also, Guggenheim S&P 500 Equal Weight Financial ETF clearly
lacks product visibility and investor appetite as is evident from
its poor average daily volume of around 4,500 shares. This in turn,
has serious implications on its bid-ask spread ratio which
increases the total costs of investing in RYF thereby limiting the
realized return potential for investors.
Nevertheless, the ETF has a strong value tilt in its investment
style, which paves the way for relatively higher returns than the
broader market over the long term. Also, the equal weighing
methodology goes a long way in eliminating company/event specific
risk for the product, as bigger companies with higher market
capitalization (implying more weighting) could distort the overall
returns of RYF (see
Is It Time For an Equal Weight ETF?
Not surprisingly, it has a three year annualized standard
deviation of 25%, which is low considering that the ETF is a
function of the financial sector which is prone to exhibiting
higher volatility than other sectors. This is reflected in our risk
outlook for RYF as it has earned a
risk outlook along with a
Zacks Rank of 1 or 'Strong Buy.'
From a holdings perspective, the ETF currently holds 81
securities which is exactly equal to the number of financial stocks
listed in the S&P 500 Index. The individual weighting of each
components vary from 1.31% to 1.08%. Some of its holdings include
Progressive Corp., Chubb Corp, Moody's Corp, M&T Bank Corp, and
Allstate Corp (see
Best Construction ETF to Ride the Housing
From an industry perspective, the ETF mostly places its bets on
Insurance (27.33%), Real Estate Investment Trusts (19.62%), Capital
Market Intermediaries (17.01%) and Commercial Banks (16.07%) (see
more in the
Zacks ETF Center
RYF has had an excellent run so far this year. It has returned
around 19.60% every year-till-date as on 30
September 2012. On a one year basis the ETF is up by almost 33%.
After returning almost 20% in the 1
quarter ending March 2012, the ETF slumped in the subsequent
quarter fetching negative returns of almost 6%.
Nonetheless, amidst the current positivity of global economic
conditions, the ETF has been able to rebound and returned 6.51% for
the third quarter ending September 2012. The ETF hit a low of
$19.91 and has a 52-week high of $29.65.
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GUGG-SP5 EW FIN (RYF): ETF Research Reports
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