It began in late October, when State Street changed indexes on
five financial ETFs. It shelved benchmarks provided by KBW in favor
of a quintet from S'P.
A week later, on Nov. 1, Invesco PowerShares launched four ETFs
using four of those ditched KBW indexes that had formerly been
tracked by SPDRs.
KBWâs Director of Research Frederick Cannon told IndexUniverse
at the time that the KBW index model âmore closely mirrors what
investors consider when they think of the market-cap universe of
large-cap banks.â He correctly pointed out that the S'P indexes
are equal weighted.
Thereâs more to it, though, because the KBW indexes arenât
purely market-cap weighted either. In fact, one of the new
ETFsâthe KBW Regional Banking Portfolio (NYSEArca:KBWR)âis
equal weighted too.
Still, KBWR and its SPDR counterpart, the SPDR S'P Regional
Banking ETF (NYSEArca:KRE), only share 67 percent of their
portfolios by weight, which suggests
Cannon may have had a point when he argued that KBW has a âmore
rigorousâ method of assigning stocks to categories than under the
The remaining three new PowerShares ETFsâthe PowerShares KBW
Bank Portfolio (NYSEArca:KBWB), PowerShares KBW Capital Markets
Portfolio (NYSEArca:KBWC) and PowerShares KBW Insurance Portfolio
(NYSEArca:KBWI)âall track what KBW calls âfloat-adjusted
modified capitalization-weightedâ indexes.
Thatâs quite a mouthful. So what exactly do these indexes
First of all, KBW limits its indexes to the 24 biggest companies
by market capitalization in each respective category. In contrast,
the SPDR S'P Bank ETF (NYSEArca:KBE) holds 40 securities, the SPDR
S'P Capital Markets ETF (NYSEArca:KCE) holds 46 and the SPDR S'P
Insurance ETF (NYSEArca:KIE) holds 43.
KBWâs index methodology document describes its modified
capitalization-weighting scheme as âa hybrid between equal
weighting and conventional capitalization weighting.â That
- The largest securityâs weight is capped at 10 percent
- The weight of all securities with 5 percent or higher are
together capped at 48 percent
- If the largest securityâs weight is greater than 10
percent, all securities weighted at 10 percent or higher are
reduced to 8 percent.
- If the securities with over 5 percent weightings exceed 48
percent of the index, their collective weights are reduced to 40
percent. The extra weight, in this scenario, is redistributed
equally to the smaller securities in the index.
Also, KBW rebalances its indexes quarterly to maintain these
The KBW indexes are undoubtedly more focused on large-cap
companies, even before the weighting differences are taken into
Still, itâs a stretch to say that they accurately capture the
U.S. large-cap banking, capital markets or insurance
According to the Thomson Reuters business classification system,
Wells Fargo makes up about 19.6 percent of the U.S. banking
industryâs market capitalization. JPMorgan Chase is close behind
with 18.9 percent, and Citigroup makes up a still-sizable 11.8
percent. All three of these securities, under KBWâs methodology,
would be capped at 8 percent.
The story is the same with the capital markets and insurance
industries ETFs using KBW indexes.
So how different are the two indexes? Depending on your time
frame, your choice can have a sizable impact on your returns.
Over the past five years, the S'P Select Capital Markets Index
has outperformed the KBW Capital Markets Index by 12 percent.
Over the same period, the KBW Insurance Index practically
overlapped the S'P Insurance Select Industry Index.
If, however, you limit your time frame to three years, the KBW
Banks Index outperforms the S'P Banks Select Industry Index by 11
percent. At one point, in April 2010, the KBW index was beating the
S'P Index by 25 percent.
Note:All S'P index data prior to 9/12/11 is back-tested.
For investors who want large-cap exposure to the above-mentioned
industries, the KBW indexesâand the PowerShares ETFs that track
themâare your best option.
But for those who, instead, are interested in a more diversified
set of companies, the S'P indexesâand the SPDR ETFs that track
themâare there for you.
Some ETF insiders think a money dispute was the real story
behind SSgA dumping the KBW indexes, but for those looking beyond
that, there are clear differences between the KBW and S'P indexes
that advisors and investors alike ought to understand.
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