Those ETFs that skip on particular investment themes or sectors,
or so-called "ex" funds, are not the newest concept to come along.
However, the allure of "ex" ETFs is robust and
investors have not been shy about embracing some of
Amid Europe's ongoing sovereign debt crisis, the LIBOR fiasco
and other issues, investors might do well to consider ex-financials
strategies, ETF sponsor WisdomTree opined in a recent report.
"..banks have started operating more like hedge funds, becoming
involved in ever more complex assets with increasing amounts of
leverage-potentially enhancing returns during positive markets but
worsening losses during difficult ones. A recent issue involving
financial firms concerns potential manipulations of the LIBOR, a
global benchmark rate to which trillions of dollars' worth of
borrowing are tied,"
WisdomTree said in the report
WisdomTree, which is one of the largest purveyors of "ex" ETFs,
said a return to the drachma by Greece could spur a bank run in
that country that could spread to Italy and Spain. That could be
one reason to avoid the financial service sector.
Another is negative bond yields. WisdomTree noted that Germany
recently issued two-year bunds that were bid up to the point that
yields turned negative. As of July 17, Austria, Denmark, Finland,
the Netherlands and Switzerland also had two-year bonds with
"priced with negativity yield-to-maturity metrics," WisdomTree
Adding to the risk of owning international financial services
firms is the high leveraged spotted within the group. The leverage
of the MSCI EAFE Index was 7.5x, while an equal-weighted average of
the leverage of the other nine sectors was slightly more than
one-third that level, at just 2.6x, according to WisdomTree.
The iShares MSCI EAFE Index Fund (NYSE:
), which is home to $35.3 billion in assets under management,
tracks the MSCI EAFE Index and features a 22.6 percent weight to
financials. With different weights, the WisdomTree International
Dividend ex-Financials Fund (NYSE:
) offers exposure to many of the same countries as EFA, but with a
vastly superior yield. DOO has a
distribution yield of almost 11.1 percent and a
30-day SEC yield of 4.94 percent
. By comparison, EFA yields just 3.42 percent with a 30-day SEC
yield of 4.48 percent.
Looking at the leverage issue for U.S. equities, WisdomTree
found the S&P 500 Index had leverage of 4.5x while the
equal-weighted average of the other nine sector indexes was just
2.7x. That is clearly better than what investors find with
international developed market plays, but by no means
Financials account for almost 14.3 percent of the SPDR S&P
) sector weight and a 2012 rally in the group has contributed to an
almost 12 percent gain for SPY. Conversely, the WisdomTree Dividend
ex-Financials Fund (NYSE:
) has gained 7.2 percent this year.
However, the advantages of an ex-financials strategy,
particularly with DTN, become apparent during times of elevated
controversy for bank stocks. In the past 90 days, investors have
had to contend with J.P. Morgan Chase's (NYSE: ) London Whale issue
as well as the LIBOR imbroglio. Over that time, DTN has outpaced
SPY by nearly 30 basis points.
The ex-financial strategies with both U.S. and foreign stocks
also show lower standard deviations than the S&P 500 and the
MSCI EAFE Index. Standard Deviation is the statistical measure of
the degree to which an individual value in a probability
distribution tends to vary from the mean of the distribution,
according to iShares.
For more on "ex" ETFs, click .
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