If it wasn't for the Finance sector, second quarter earnings
season would have been rather disappointing. The financial sector,
which was one of the best performing segments in 2012, continued
with its impressive performance this year, adding on to its recent
Owing to robust earnings from the banking sector, investor
confidence has received a boost as well. In fact, the financial
sector has seen earnings growth of +30% year-over-year in Q2. The
sector could maintain its relative strength attributable to strong
banking numbers from most of the top stocks in the
2 Sector ETFs Surging This Earnings Season
However, the taper postponement by Bernanke has caused trouble for
the financial sector, while there have also been concerns over
revenues as well. This was witnessed when Citigroup took a dip by
almost 3.2% which led to some rough trading in a number of
companies in the space (Read:
Financial ETFs Tumble on Citigroup Warning
This news led to some modest losses for a number of companies in
the sector, sending industry share prices down several percentage
points on the session. In particular, many financial sector ETFs
were the hardest hit by Citigroup's news.
For now we have chosen an ETF which currently has a Zacks ETF Rank
of 1 or 'Strong Buy' and may prove to be a safe haven during these
troubled times, and a better play on the strong parts of the
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the
context of our outlook for the underlying industry, sector, style
box or asset class (read:
Zacks ETF Rank Guide
). Our proprietary methodology also takes into account the risk
preferences of investors. ETFs are ranked on a scale of 1 (Strong
Buy) to 5 (Strong Sell) while they also receive one of three risk
ratings, namely, Low, Medium or High.
The aim of our models is to select the best ETFs within each risk
category. We assign each ETF one of the five ranks within each risk
bucket. Thus, the Zacks ETF Rank reflects the expected return of an
ETF relative to other products with a similar level of risk.
For investors seeking to apply this methodology to their portfolio
in the financial sector, we have taken a closer look at the top
First Trust Financials AlphaDEX Fund (
. This ETF has a Zacks ETF Rank of 1 or 'Strong Buy' (see the full
) and is detailed below:
Launched in May 2007, FXO tracks the Strata Quant Financial
AlphaDEX Index, which is a modified equal-dollar weighted index.
The benchmark is designed by NYSE Euro-next to objectively
identify and select stocks from the Russell 1000 Index in the
financial services sector that may generate positive alpha relative
to traditional passive-style indices through the use of the
AlphaDEX selection methodology.
The ETF holds about 169 securities in its basket. The fund is well
spread across individual holdings as it does not put more than 12%
in its top 10. FXO does well in eliminating concentration risk as
it does not allocate too much in any single component.
Nationstar Mortgage Holdings, Ocwen Financial Corporation and
FleetCor Technologies are the top 3 holdings of the fund. FXO does
not allocate more than 1.5% allocation across individual holdings
From an industry exposure perspective, Insurance leads with 36.44%
allocation while Commercial Banks, Capital Markets and IT Services
together make up 37%.
FXO currently has an asset base of $450 million and on an average
does a daily volume of about 249,000 shares. It also pays out a
paltry yield of 1.69% (see more in the
FXO has played quite a significant role in the financial ETF world
by delivering notable returns. The fund has given sturdy returns of
about 23.9% year to date. In fact, the product is hovering well
above its 200-day moving average of $18.33.
The product, however, is a little costly as it charges a high 70bps
in fees due to its innovative fund management technique. The fee is
much higher than the category average of 47bps.
The Bottom Line
While many may still have concerns over the financial sector's
upswing, especially after the 2008 financial crisis, financial ETFs
by applying a diversified approach not only in the U.S. but also
across various financial institutions globally, offer a great way
to play the sector (Read:
3 Sector ETFs to Watch for the Budget Battle
Given that the financial sector should continue with its strong
momentum and its dominant role in the broad markets, FXO is poised
to benefit and may see more room for upside going into 2013's home
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FLEETCOR TECH (FLT): Free Stock Analysis Report
FT-FINL ALPHA (FXO): ETF Research Reports
NATIONSTAR MTGE (NSM): Free Stock Analysis
OCWEN FINL CORP (OCN): Free Stock Analysis
SPDR-FINL SELS (XLF): ETF Research Reports
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