Exchange traded funds indexed to the U.S. financial sector were getting a boost Wednesday from Goldman Sachs (NYSE: GS - News), which saw its shares vault 4% in the wake of the quarterly earnings report.
Financials have posted impressive gains thus far in 2012, outpacing the broad market as XLF (SPDR Financials) is up 5.54% versus the SPX (S&P 500) rallying 3.04%. However, in the trailing one year period, we note severe underperformance in the sector, with XLF down 17.94% versus SPX unchanged during this timeframe.
And if we go out on the calendar and examine the 5 year trailing period, XLF has lost 62.92% versus the SPX down 9.72%. So clearly, the sector has some significant ground to make up, and perhaps the recent call buyers in XLF are playing this possibility.
XLF is challenging its 200 day moving average and trading near its highest levels since before the 2011 August equity meltdown. Noting that XLF is heavily tilted towards large cap banks, with top holdings being comprised of WFC, BRK.B, JPM, C, and BAC, other alternatives exist for those whom want to play the sector from the long side and perhaps take a differentiated indexing approach.
FXO (First Trust Financials AlphaDEX) takes a quantitative/fundamentally screened approach to the sector, as does PFI (PowerShares Dynamic Financials), while RYF (Guggenheim S&P Equal Weight Financials) tracks the same index as XLF only it is equal weighted instead of being based on a market cap weighted methodology.
RWW (RevenueShares Financials) is also based on the S&P Financials index, but ranks the component stocks by revenues in order to determine the weightings. IYF (iShares Dow Jones U.S. Financials) and VFH (Vanguard Financials) are also other potential opportunities, and the funds simply track indexes outside of the S&P Financials index and thus have a different portfolio make-up and weightings.
It makes sense for the portfolio manager to delve into the details when examining sector funds of this sort, and determine which indexing methodology or methodologies, melds with their overall investment goals (i.e. “Do I believe that large cap banks will outperform, would I rather have evenly weighted exposure across the broad financials sector and not be necessarily concentrated in banks, etc.”).
In the trailing one year period, PFI has demonstrated the best performance, as it is down 5.38% versus FXO (-9.05%), RYF (- 12.43%), IYF (-14.35), VFH (-15.61%), XLF (-17.94%), and RWW (-23.23%).
PowerShares Dynamic Financials
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