I wouldnât be caught dead owning Bank of America. Itâs one
costly settlement after another for the once mighty company. This
time the tab comes in at $335 billion in connection with subprime
loans made by its Countrywide unit to borrowers who qualified for
lower-rate prime loans.
Should this and Fitchâs recent downgrade of the bank drive the
stockâs price below $5 -- the minimum acceptable share price for
many of the nationâs largest pension funds -- downward momentum
Even beyond Bank of America, I canât even get my head around why
someone would want exposure to this segment. But I shouldnât mock
what could turn out to be a profitable contrarian idea. Moreover,
it can be done, as I said, Bank of America-free, using ETFs.
But first the bad news that validates my sense that BAC stinks to
In the year-to-date total return chart below, notice the nearly 24
percent decline of RWW, the RevenueShares Financials ETF (NYSEArca:
RWW). The revenue- weighted offering gives investors the most
concentrated exposure to the bank â 8.2 percent -- an unpleasant
distinction if ever there was one.
Whatâs more, all but two of the funds in the chart have had
terrible years in 2011.
The good news for these investors is they do have options.
Of the 10 funds in the US Financial segment as determined by our
ETF Finder, four have no exposure to Bank of America, and their
differences are significant. They also happen to be the segment's
four best performing funds YTD.
FXO, the First Trust Financials AlphaDEX ETF (NYSEArca:FXO and PFI,
the PowerShares Dynamic Financial Portfolio (NYSEArca:PFI), both
have proprietary methodologies to weight and select companies for
inclusion. They use a range of growth and value metrics to
determine which banks are poised to outperform.
The problem with these funds is that BAC's valuation could, in the
future, trigger these indexes to include the company in future
rebalances. So, while investors are safe from the bank's problems
for now, they're not guaranteed to be in the future.
PSCF, the PowerShares S'P SmallCap Financials Portfolio
(NYSEArca:PSCF), on the other hand, targets only small-cap
financials. As such, it not only has no BAC exposure, there is
unlikely to be any in the future unless B of A really hits the
skids and downsizes in a big way.
I'd venture to guess that Bank of America is more likely to go
belly up or be swallowed up by one of the nation's other leading
banks before that happens.
The other option is KBWD, the PowerShares KBW High Dividend Yield
Financial Portfolio (NYSEArca:KBWD). Its index weights companies by
dividend yield, and is unlikely to include BAC at any time in the
foreseeable future, unless the bank starts borrowing money to pay a
These portfolios are not without their own risks, but, hey, if
you're interested in financials, you're likely more in tune with
those risks than I.
Investors looking abroad will find little shelter. For starters,
the only global financial ETF, the S'P Global Financials Sector
Index Fund (NYSEArca:IXG), has 1.36 percent of its portfolio in
BAC. Add that to the fact it also holds a number of European banks
hard-hit by the European sovereign debt crisis and suddenly the
word looks very flat.
In the end investors scared off by the vast sea of headline risk
facing BAC, can get U.S. financials exposure while insulating
themselves from the problems facing these firms.
But that still leaves me thinking:What are these investors
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