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US Financial ETFs & Return Dispersions

Hannah Tool

Major League Baseball. German engineered cars. Exchange-trade funds. Within each realm, competition exists. And while rivalry makes watching the Red Sox win its third World Series in a decade a wonderful—or terrible—experience, depending on your coast of domicile, losing value in your portfolio against a comparable ETF is no one's favorite sport.

Within almost every segment of the ETF universe dwell superstars, underdogs and dunces.

When it comes to U.S. financials, in which 10 ETFs currently reside, some fairly wide year-to-date performance spreads have been seen, in spite of no disparaging events blighting the name of the segment.


Ticker Fund Total Return (%)
FXO First Trust Financials AlphaDEX 32.84
KWW RevenuevShares Financials 32.30
RYF Guggenheim S'P Equal Weight Financial 31.24
PFI PowerShares Dynamic Financial 28.86
XLF Financial Select SPDR 27.23
IYF iShares U.S. Financials 26.58
PSCF PowerShares S'P SmallCap Financials 26.03
VFH Vanguard Financials 25.98
KBWD PowerShares CBW High Dividend Yield Financial 15.67
FNCL Fidelity MSCI Financials No Data



It's important to note that the Fidelity MSCI Financials fund ( FNCL ) is technically the cheapest in the segment at 12 basis points, but this fund only launched on Oct. 23; therefore, it doesn't yet have comparable AUM or performance to throw it into the ring.

That being said, U.S. financial ETFs have rallied this year, with the First Trust Financials AlphaDEX fund (FXO | B-80) leading the funds' stride with a 32.84 percent spike since the close of 2012.

That's nothing to scoff at—unless you were the investor who opted out of FXO for the PowerShares KBW High Dividend Yield Financial ETF (KBWD | C-25), which has gained less than half of FXO's performance this year, rising 15.67 percent.

Why The Disparity?

First of all, although these funds land in the U.S. financials segment and are considered competitors, KBWD's basket holds just 39 of the securities in the segment, while FXO carries 168.

Within the 39 securities of KBWD's basket, there are a few key players missing, like Wells Fargo and J.P. Morgan, which tilts the fund toward smaller-cap securities. It also gives it a hefty overweight to residential and commercial REITs, with 37 percent allocated to that sector.

FXO is also allocated no more than 1.43 percent to any single security, while each of KBWD's top 10 holdings scoop up more than 3 percent of the fund's portfolio.


The drag on KBWD's performance, though, is its ultra-high expense ratio. The nine funds that share the U.S. financials segment with KBWD average a price tag of 43 basis points. KBWD costs 148 basis points.

With a fraction of the holdings and three times the expense ratio, it's clear after close analysis that, while they're competitors indeed, some segment "rivalries" are more similar to Red Sox versus Astros than Red Sox versus Yankees when it comes to performance.

Biggest Isn't Best

If returns are your only concern, then the biggest of the big in the U.S. financials segment isn't the best. It's actually pretty average, in terms of year-to-date returns.

But it has two things investors love that can make up for a few basis points of performance lag:killer liquidity, and a dirt-cheap price tag.

The Financial Select SPDR (XLF | A-87) has $15 billion in assets under its belt, with an average daily volume of more than $800 million. It's the second-cheapest in the segment, too, at 18 basis points.


Ticker Fund AUM ($,B)
XLF Financial Select SPDR 15.01
VFH Vanguard Financials 1.59
IYF iShares U.S. Financials 1.32
FXO First Trust Financials AlphaDEX 0.51
KBWD PowerShares KBW High Dividend Yield Financial 0.23
PSCF PowerShares S'P SmallCap Financials 0.10


Glancing at the chart above, which shows the top five U.S. financials ETFs by AUM, you'll see that the second-largest in the sector, the Vanguard Financials fund ( VFH | A-94 ), is a fraction of the size of XLF, with $1.6 billion in assets.

VFH costs only 1 basis point more than XLF, but its average daily volume is $7.4 million. VFH is also the only fund in the segment that doesn't disclose its holdings daily. Illiquidity and nontransparency hurt the investor appeal for VFH, as does its second-to-last-place YTD performance within the segment.

U.S. financials are just one of many segments with performance, liquidity and cost discrepancies that make the playing field bumpy, to say the least. The segment serves up a quintessential example, though, of the factors that go into a home-run fund, and those that can cause an ETF to strike out.


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