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Top Financials ETFs Poised To Rally Further

The financials sector is hot. Since the U.S. presidential election on Nov. 8, it's the best-performing sector of the stock market, with gains of more than 17%.

Even going back a full year, financials are at the top of the pack when it comes to returns.

Sector

Return Since Election (%)

Financials

17.26

Materials

11.35

Telecom

9.63

Industrials

8.59

Consumer Disc.

8.17

Tech

6.50

Health Care

4.69

Energy

4.47

Real Estate

0.58

Consumer Staples

-0.21

Utilities

-0.83

According to Brad Sorensen, head of market and sector analysts for the Schwab Center for Financial Research, the financials sector was "supercharged after the election as the prospects of a lighter regulatory environment, a steeper yield curve and the Fed’s December hike drew investors back to the long-shunned sector."

Sorensen, like many analysts, expects financials to continue to outperform the broader market. He points to growing financial strength among financial firms, improving consumer finances, and reduced regulatory burden as driving the group higher in the coming year.

If that bullish thesis for the sector comes to pass, financial exchange-traded funds may turn out to be some of the best performers again for a second year in a row. Here we take a look at the different ETF options available for investing in the space.

Broad Financial Sector Options

There are currently 53 funds listed in the ETF.com Financial Channel. All together, these ETFs have about $48.5 billion in assets. As is typical in the exchange-traded fund world, just a few products have the bulk of the assets. The top five financials ETFs account for 75% of the total assets, while the top 10 account for 86%.

Here are the top 10:

Ticker

Fund

Issuer

Expense Ratio

AUM

Segment

XLF

Financial Select Sector SPDR Fund

SSgA

0.14%

$22.76B

Equity: U.S. Financials

VFH

Vanguard Financials Index Fund

Vanguard

0.10%

$5.22B

Equity: U.S. Financials

KRE

SPDR S&P Regional Banking ETF

SSgA

0.35%

$3.62B

Equity: U.S. Banks

KBE

SPDR S&P Bank ETF

SSgA

0.35%

$3.09B

Equity: U.S. Banks

IYF

iShares U.S. Financials ETF

BlackRock

0.44%

$1.87B

Equity: U.S. Financials

FAS

Direxion Daily Financial Bull 3x Shares

Direxion

0.96%

$1.34B

Leveraged Equity: U.S. Financials

IYG

iShares US Financial Services ETF

BlackRock

0.44%

$1.14B

Equity: U.S. Financial Services

FXO

First Trust Financials AlphaDex Fund

First Trust

0.64%

$1.00B

Equity: U.S. Financials

KIE

SPDR S&P Insurance ETF

SSgA

0.35%

$959.59M

Equity: U.S. Insurance

UYG

ProShares Ultra Financials

ProShares

0.95%

$799.45M

Leveraged Equity: U.S. Financials

Unsurprisingly, the Financial Select Sector SPDR Fund (XLF), part of the venerable line of SPDR sector funds, is the largest ETF in the space. It's a low-cost offering that provides exposure to the financial sector within the S&P 500. Aside from XLF, there are four other broad financial ETFs that track the complete sector―including the banks, diversified financials and insurance industry groups.

The Vanguard Financials Index Fund (VFH), one of the cheapest funds in the space, takes a broad approach by holding all financials stocks in the top 98% of the U.S. market by capitalization.

The iShares U.S. Financials ETF (IYF) is another broad fund that holds stocks across the market-cap spectrum. IYF still holds real estate stocks (20% of the portfolio), which contrasts with many other financials ETFs that had spun off real estate to adhere to changes in the Global Industry Classification Standard last year.

For investors looking for an iShares financial product that excludes real estate, the iShares U.S. Financial Services ETF (IYG) fits the bill. It holds a similarly broad basket of financials as its sister fund, but omits real estate.

Meanwhile, the First Trust Financials AlphaDex Fund (FXO) uses a quant model to select financial stocks to hold based on price appreciation, sales to price ratios, sales growth and value factors. The fund has a relatively high expense ratio—0.64%—but may appeal to investors who have faith in the multifactor AlphaDex methodology.

Leveraged & Industry Funds

Also on the list of the 10 largest financials ETFs are two leveraged products, the Direxion Daily Financial Bull 3x Shares (FAS) and the ProShares Ultra Financials (UYG). FAS provides 3x leveraged exposure to the large-cap Russell 100 Financial Services Index, while UYG provides 2x leveraged exposure to the broader Dow Jones U.S. Financials Index.

As always, buyers of leveraged products should be mindful of the impact of daily rebalancing on returns.

The last three of the big financial ETFs target specific industries or subindustries within the sector. The SPDR S&P Bank ETF (KBE) and the SPDR S&P Insurance ETF (KIE) own stocks within the banks and insurance industries, respectively. They both equal-weight their holdings.

Likewise, the SDPR S&P Regional Banking ETF (KRE) holds an equal-weighted basket of stocks within the regional banking subindustry.

Funds like KBE, KIE and KRE are designed for investors looking to take a more targeted approach to investing in financials. That can sometimes pay off―KBE and KRE were among the top-performing financial ETFs since the election, with returns of more than 25%, as investors reasoned that banks will be some of the biggest beneficiaries in the post-Trump world.

For a full list of the top 10 financial ETF winners since the Nov. 8 election, see the table below:

At the time of writing, the author did not own any of the securities mentioned. Contact Sumit Roy at sroy@etf.com.

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