Financials have come a long way since the 2008 economic crisis.
The performance of the financial sector has been storming back
since then and has seen another solid performance so far in 2012 as
Still, the sector could be facing some headwinds thanks to
Europe and their sovereign debt crisis as we approach 2013,
suggesting that it isn't all good news for the space. Nevertheless,
there are some ETFs which may be able to weather the storm better
than most, depending on their investment focus (
For Financials, Look to These Top Zacks Ranked
While financial ETFs are linked to many industries ranging from
broad space to other niche industries, some are undoubtedly more
insulated from shocks than others. In our opinion, one such
industry that could be more immune than others is in the Real
Estate Investment Trust (REIT) industry.
The U.S. REIT sector has been a very strong performer so far
this year, driven by strengthening fundamentals for commercial real
estate and an improving outlook for the U.S. economy despite some
recent doubts. The uptrend in the diffusion index further suggests
that economic growth is broadening across sectors and indicates a
higher probability of a firmer foundation for future growth (
The Introductory Guide to Real Estate ETF
Given the strong performance of this space so far this year, it
is worthwhile to take a look at financial ETFs which have heavy
concentration in the REIT industry. While there are certainly pure
REIT ETFs that can be used, a broader approach could be ideal at
this time, especially if other nations can get their economies in
Due to this, a diversified technique that leans on the REIT
market could be an ideal way to target the financial sector. For
these investors, we have highlighted two financial ETFs below that
have maximum REIT exposure; KBWD and PSCF.
KBW High Dividend Yield Financial ETF (
For investors seeking a REIT concentrated financial ETF, KBW
High Dividend Yield Financial ETF is an intriguing choice. The REIT
industry dominates the holding pattern of this ETF with more than
50% of the asset base going towards the sector. The product uses a
dividend yield weighting methodology which produces a fund with a
small basket of 36 stocks (
Real Estate ETFs: Unexpected Safe Haven
The companies qualifying for inclusion in the top 10 holdings
are all from the REIT industry with just one exception, suggesting
a relatively concentrated bet for investors. Besides 51% of the
asset base going towards REITs, investors should note that around
46% comprise the top 10 holdings. So this plays a very influential
role in the performance of the ETF (
Time for a Commercial Real Estate ETF?
Among individual holdings, Invesco Mortgage Capital Inc. takes
the top spot in the fund, although no one security makes up more
than 5.7% of assets. Among sector holdings, after REIT, banks
qualify for the second highest allocation with asset share of 21%.
Among others, it is just consumer finance which gets double-digit
allocation in the fund.
The product also potentially provides a different market cap
level of exposure as large caps account for just 10% of the total
assets. Instead, micro caps make up roughly 24% while small caps
make up nearly half of the total portfolio.
While style favors value stocks more with 70% value stocks, 22%
pure value and just 8% growth stocks. So it seems that this ETF has
a tilt towards undervalued stocks or stocks trading at a discount
to their price.
As its name suggest and as per its weighting methodology, the
fund has a handsome dividend yield of 9.66%. This makes it
attractive for the investor seeking for current income in this
ultra low rate environment (
12 Ways to Earn High Yields with ETFs
). However, this is a pretty expensive fund as it charges investors
a fee of 1.32% annually.
So far this year, the performance of both the REIT industry and
other financial sectors has been quite good which is reflected in
the fund's year-to date returns, which stand at 14.95%. Over
a period of one year, the fund delivered a return of 10.95%.
PowerShares S&P SmallCap Financials Portfolio
Another ETF with heavy exposure towards the REIT industry is
PowerShares S&P SmallCap Financials Portfolio. Although this
ETF does not give the majority of its assets to the REIT industry
among its sector allocation, a substantial 41% of the asset base is
invested in the REIT industry.
The fund is linked to the S&P SmallCap 600 Capped Financials
Index thereby avoiding big financial stocks. The fund is home to a
large basket of 102 stocks. A look at the top 10 holdings suggests
that although the fund prioritizes financials to REITs, the latter
dominates the top 10 holdings pattern of the ETF. Investors should
note that 8 out of 10 largest holdings in this ETF are from the
Among individual holdings, Extra Space Storage and Kilroy Realty
Corp are given equal weighting in the portfolio (3.38%) while
Tanger Factory Outlet, which occupies the third spot in the fund,
is allocated 2.97% of the asset base. The majority of holdings are
value stocks. For this exposure, the fund charges an expense ratio
of 29 basis points (
Is ROOF a Better Real Estate ETF?
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PWRSH-K HDY FP (KBWD): ETF Research Reports
PWRSH-SP SC FIN (PSCF): ETF Research Reports
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