3 Surging Financial ETFs Beating the Market


The financial sector is rebounding nicely from the crisis that we saw in 2008. Now, the space is undoubtedly back on track, with some players forecasting big gains in the future.

This is especially true as investors slowly move into the “riskier” corners of the stock market (cyclical stocks) from the defensive sectors such as healthcare, utilities and consumer staples (read: Buy These ETFs to Profit from "Sector Rotation").

Now, with an improving job market, housing recovery, robust retail data and increase in consumer confidence, the capital market is certain to benefit from the positive sentiment. Additionally, Standard & Poors upgraded the credit outlook for U.S. from negative to stable, adding to further strength in this cyclical sector.

Further, valuation levels are relatively reasonable for many stocks in the financial sector, suggesting that there is room for more upside.

The segment started 2013 with a bang, posting solid gains across the board as strong earnings propelled the segment higher. Many financial ETFs have impressed with their outstanding performances of late, gaining double digits. Interestingly, these top performers are spread out among various financial segments, especially life insurers and e-brokers.

These stocks are benefiting from the growing speculation over an interest rate rise as the Fed has hinted that it will curb its monetary easing measures soon. Many expect life insurers and e-broker firms to be the major beneficiary in this environment in the U.S. financial sector, and provide the best returns to investors going forward (read: 3 Sector ETFs Surviving This Slump).

Top Performers

Below, we have highlighted the three top ETF performers which have not only managed to stay profitable, but have provided handsome returns in the year-to-date time frame. In fact, these funds have outpaced the broader funds by wide margins so far in 2013 as well.

Investors should note that these funds will continue to move higher if investor preferences remain the same, and if the economy’s resurgence stays on track (see more in the Zacks ETF Center).

iShares Dow Jones US Broker-Dealers ETF (IAI)

This fund seeks to track the performance of the Dow Jones U.S. Select Investment Services Index, before fees and expenses. The benchmark tracks companies in the investment services sector, a sub-sector within the broader financial sector of the U.S economy.

IAI employs a representative sampling technique to include stocks in its portfolio. This ETF is appropriate for investors looking to get exposure to brokerage firms, dealers and other facilitators directly involved in the capital markets (read: Time for This Top Ranked Financial ETF?).

The product currently holds 22 securities and invests around 61% of total assets in its top 10 holdings. Knight Capital (KCG), Goldman Sachs (GS) and Morgan Stanley (MS) occupy the top three positions in the basket.

The fund has amassed an asset base of about $108.2 million while charging investors a relatively high fee of 45 bps. The daily volume is relatively good at roughly 78,000 shares a day, suggesting that investors have to pay extra in terms of wide bid/ask spread.

The ETF had a strong run this year, gaining more than 28.5% in the year-to-date timeframe. It also pays out a good 1.97% in annual dividends. IAI currently has a Zacks ETF Rank of 3 or ‘Hold’, along with a Medium risk rating (read: Zacks ETF Rank Guide).

PowerShares KBW Insurance Fund (KBWI)

This fund provides investors exposure to the insurance sector of the broad financial segment by tracking the KBW Insurance Index. It has amassed about $5.5 million in AUM while volume is very light, probably increasing the total cost for this unpopular fund.

The fund holds 24 securities in its basket and charges a low annual fee of 35 bps. The product is relatively well spread out among its top ten holdings with nearly 57% of assets, at least considering the small number of securities in the portfolio. MetLife (MET), Travelers Co (TRV) and Chubb Corp (CB) take the top three spots in the basket with a combined share of 21.65%.

The ETF focuses more on large caps, as these account for 62% of the total assets while mid cap and small caps take the remaining portion. Further, the portfolio has a tilt towards the value stocks, probably ensuring safety of returns (read: Time to Consider Pure Growth and Value ETFs?)

In terms of performance, the product has gained more than 28.5% so far this year. The yield is also relatively good at 2.4% per annum, helping to give the ETF a Zacks ETF Rank of 3 or Hold and a Low risk rating.

PowerShares KBW Capital Markets Fund (KBWC)

This ETF follows KBW Capital Markets Index, which measures the performance of the companies that do business as broker-dealers, asset managers, trust and custody banks or exchanges.

With holdings of 24 stocks, the product is slightly concentrated in its top 10 holdings as it puts 62% of assets in these ten stocks. State Street, MS and GS occupy the top three spots with a combined 28% share in the basket (read: 3 ETFs Beating the S&P 500).

Although the ETF is a large cap blend fund, it manages an asset base of $10.6 million. In addition, the fund trades in weak volumes, so the bid/ask spread could be pretty wide. Still, the product has a relatively low fee of just 35 bps a year.

The ETF has added nearly 28.5% year-to-date while it has a solid yield of 2.77% annually. KBWC currently has a Zacks ETF Rank of 1 or ‘Strong Buy’, along with a Medium risk outlook.

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Read the analyst report on KBWC

Read the analyst report on KBWI

Read the analyst report on IAI

Read the analyst report on XLF

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