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Time for This Top Ranked Financial ETF?

Zacks Equity Research

Although many investors were worried about earnings season, the past one was generally pretty solid, with many companies beating expectations. This was especially true in the financial sector as companies in this space have seen solid earnings results and have been a top performing sector as well.

This continues the solid stretch for the sector, as many firms have rebounded completely from the financial crisis several years ago. Now, the space is undoubtedly back on track, with some forecasting big gains in the future as well.

Further, valuation levels are still relatively reasonable for many stocks in the financial sector, suggesting that there could still be room to run. This could be especially true if rates remain stable and if default rates continue to stay at a low level, allowing many financial institutions to move higher.

Given this, a look at the Zacks #1 Ranked financial ETF could be a winning choice for investors especially if strong earnings performances continue through the current quarter and the upswing in the market persists ahead in the year.

One way to find a great ETF in the financial space is by using the Zacks ETF Rank (read: Zacks ETF Rank Guide).

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. 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 five ranks within each risk bucket. Thus, the Zacks Rank reflects the expected return of an ETF relative to other products with a similar level of risk (see more ETFs in the Zacks ETF Center).

For investors seeking to apply this methodology to their portfolio in the financial sector, we have taken a closer look at the top ranked PFI. This ETF has a Zacks ETF Rank of 1 or Strong Buy, and more details about this product are highlighted below:

PowerShares Dynamic Financial Sector Fund (PFI)

This fund seeks to match the price and yield of the Dynamic Financial Sector Intellidex Index, before fees and expenses. This index provide investors capital appreciation by thoroughly evaluating companies based on a variety of investment merit criteria, including price momentum, earnings momentum, quality, management action and value.

Holding 59 stocks in its basket, the fund is widely diversified across individual securities and asset classes. The product puts less than 27% of its total assets in the top 10 holdings, suggesting that company-specific risk is minimal. None of the securities make up more than 3.1% of the basket, while the top holding goes to Moody’s Corp. (MCO).

This structure results in a value tilt for the product, along with a focus on smaller securities. PFI has roughly one-fourth of its assets in mid and small cap value each, with just 13% and 15% going to mid and small cap growth stocks, respectively (read: Forget SPY, Focus on Mid and Small Cap ETFs).

Within the financial sector, insurance comprise roughly half of the total assets in the basket while banks make up one-fourth. Beyond this, consumer finance, investment companies, asset management and financial services round out the rest.

The product so far has managed assets of just $20.6 million and is less volatile as indicated by its annualized standard deviation of 15.12%. However, the fund trades with paltry volumes, suggesting that bid ask spreads are relatively wide and that total costs will come in a bit higher than the 68 bps expense ratio.

Although the ETF does not appear to be popular, its performance has been quite remarkable. PFI is one of the best performing ETFs in the recent past, delivering a robust return of more than 44% over the trailing past three years, 26.46% in the trailing one year period and over 15.70% year-to-date.

The financial ETF also yields 1.05% in annual dividends, suggesting that the fund is an extremely attractive choice in the financial sector for anyone seeking broad exposure to the space (read: Bet on Rising Dividends with This Financial ETF).

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Read the analyst report on PFI

Read the analyst report on XLF

Read the analyst report on MCO

Zacks Investment Research

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