Exchange-traded funds under the Select Sector SPDR umbrella are among the most popular on Wall Street, with the fund family boasting almost $100 billion in assets across the group.
But the largest, the Financials SPDR (XLF) — which boasts more than $20 billion in assets — could be about to disappear.
A new SEC filing from the trust that oversees these funds has revealed plans for two distinct financial ETF additions — the Financial Services Select Sector SPDR Fund (XLFS) and the Real Estate Select Sector SPDR Fund (XLRE).
The moves are borne out of a change to underlying indices used to create these sector funds, where real estate was split off from the financial sector across both S&P Dow Jones Indices and MSCI (MSCI).
That creates a bit of a headache for XLF fund investors, who may see big changes to their underlying fund investment if the index changes result in either the deep alteration or downright closure of this major financials ETF.
ETF.com recently surmised the following scenarios:
“The trust could close XLF, or it could convert it into one of the two planned funds and give it a new name, index and ticker. Or the trust could allow it to continue to trade alongside the other funds, and give investors a choice regarding which version of GICS they prefer. After all, the trust does combine technology and telecommunications into one sector, so it does adapt the classification system to fit its needs.”
Top holdings of the XLF right now are Wells Fargo (WFC), Berkshire Hathaway (BRK.B) Class B shares and JPMorgan Chase (JPM), which would make a rollover and shift to a financial services fund fairly true to the current holdings. But still, it’s a significant change and one that may be easier said than done.
Also, SPDR funds do have a lot of brand appeal, so one would think that it may be easy to keep an additional flavor of financial ETF in the stable and still attract assets. But the drawback of that is brand confusion among investors, who have long thought the XLF fund synonymous with the financial sector.
Then there’s the problem of expenses and strategy. Most SPDR funds charge about 0.15% annually, thanks in part to easy benchmarking. Would as many investors stick around in XLF if expenses have to rise to keep both indices under the same roof?
Any way you slice it, these changes are huge for SPDR and for investors in the XLF fund. Few hard details are out just yet, but it’s worth watching if you’re investing in the sector of this financials fund … because the ETF you buy now might be quite different in a few months.
Or, it might not be around at all.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at email@example.com or follow him on Twitter via @JeffReevesIP.
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