by Tom Taulli | May 21, 2012 12:09 pm
Financial stocks — they were the dogs of 2011, but they’re the heroes of 2012. Even after this spring’s marketwide selloff, financials — as measured by the Financial Select Sector SPDR (NYSE:XLF) — have gained about 7.5% on the year, well ahead of the broader markets.
Still, big banks’ difficulties the past couple months has been far from reassuring. JPMorgan (NYSE:JPM) took a recent dive after revelations of a massively bad trade under CEO Jamie Dimon’s watch — one that could cost the bank billions of dollars. Worries that similar risks face other major bank stocks — such as Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC) and Citigroup (NYSE:C) — resulted in selloffs in those companies and others.
Still, such bear moves can provide opportunities for investors to get in on some bargains. But rather than risk catching the falling knife of a single stock, a more effective way to ride a sector rebound is by investing in mutual funds or exchange-traded funds.
Concerning financial services, mutual funds and ETFs provide a much broader reach across the industry, including brokerages, insurance companies and even private equity operators.
If you think the latest dip is more pothole and less long-term trend, these five funds in particular can provide a boost to your portfolio:
The FBR Small Cap Financial Investor (MUTF:FBRSX) fund’s portfolio manager, David Ellison, has been at the helm since 1997. Before this, he worked at Fidelity for 11 years, with a focus on the financial services industry.
Ellison’s longtime industry experience has given FBRSX an edge. During the past three years, the FBR fund has generated an average return of 5% — that might not sound like much, but keep in mind that figure includes weathering an extremely difficult 2011, as well as the fund’s lofty 1.52% expense fee.
Ellison screens banks that are selling at cheap valuations to cash flows. He also is not afraid to keep money in cash if he cannot find any bargains.
FBR Small Cap Financial oversees about $186 million in assets. It’s a no-load fund, but it requires a $2,000 minimum investment.
Kenneth Feinberg has been managing the Davis Financial (MUTF:RPFGX) fund since 1997. He is a big believer in Warren Buffett’s value principles, which certainly has helped amid the financial services’ wrenching volatility since the 2008 financial crisis.
Feinberg also will add non-financial stocks to the portfolio to try to deal with the risks. Some of these holdings include Bed Bath & Beyond (NASDAQ:BBBY) and Canadian Natural Resources (NYSE:CNQ). Like Buffett, Feinberg also takes a buy-and-hold approach — the portfolio’s turnover is only about 16%.
Davis Financial has about $531.4 million in assets. It charges 0.91% in expenses and a 4.75% load fee, and it requires a $1,000 minimum investment.
Andrew Sleeman and Richard Cetlin’s Mutual Financial Services (MUTF:TFSIX) fund — which controls about $341 million in assets — not only looks across different categories of the financial services industry, but also different countries. The fund has investments in Japan’s Aozora Bank, Norway’s Oslo Børs and Switzerland’s Zurich Insurance Group.
This global approach has been helpful in generating competitive returns, as TFSIX has averaged nearly 6% gains during the past three years. The fund charges 1.54% in expenses and a 5.75% load charge, and it requires a $1,000 minimum investment.
The Financial Select Sector SPDR (NYSE:XLF) is one of the cheapest ways to get into financials.
XLF invests in a broad cross-section of U.S.-based financial firms in the S&P 500 Index, including commercial banks, insurance companies and even REITs. XLF has about $5.2 billion assets and benefits from cost savings, boasting a bargain-basement 0.18% expense ratio.
Interestingly enough, famed hedge fund manager Paul Tudor Jones — who has had a good sense of timing market sectors — recently disclosed that he purchased 8.66 million shares of the Financial Select Sector SPDR.
OK, investing in the iShares MSCI Europe Financials Sector Index Fund (NASDAQ:EUFN) sounds crazy. After all, Europe may be poised for another implosion of its banking system, and the ETF already is off 37% in the past year.
But sometimes a contrarian play can pay off big. At some point, Europe seems bound to come back, and this iShares product is a good way to play a potential rebound. EUFN is diversified across countries like the U.K., France, Switzerland, Germany and Italy, and it charges a reasonable 0.48% in fees.
However, considering just how volatile the landscape is, it might be worth waiting a month or so to see how play things out before investing in EUFN.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”, “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.
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