Considering the Federal Reserve is obliging with ongoing interest rate hikes, the financial services sector has been an epic disappointment this year. The Financial Select Sector SPDR (NYSEARCA:XLF), the largest financial ETF by assets, is sporting a barely noticeable year-to-date.
Even though the Fed unveiled its third rate hike of 2018 on Wednesday, XLF finds itself in a general slide, positioning the financial ETF for a weekly loss of 3% or more. In other words, financial ETFs, which were supposed to benefit from rising interest rates, are struggling at a time when the Fed is doing all it can to help financial ETFs and stocks.
Investors are displaying their dissatisfaction with financial ETFs and related funds. Year-to-date, XLF has seen nearly $981 million of outflows. Some of the major financial ETFs, including XLF, have seen third-quarter inflows, but that could have been in anticipation of the Fed rate hike. With that catalyst in the rearview mirror and financial ETFs failing to impress after the Fed meeting, skittish investors could again abandon financial stocks.
There are some positive traits to consider with financial ETFs, however. The sector is attractively valued relative to the broader market and is home to steadily rising dividends. Here are some financial ETFs to buy for investors looking for bargains and rebound potential.
First Trust Financials AlphaDEX ETF (FXO)
Expense Ratio: 0.63% per year, or $63 on a $10,000 investment.
Compared to some of the other financial ETFs, the First Trust Financials AlphaDEX ETF (NYSEARCA:FXO) is performing admirably this year with a gain of just over 2%. FXO features significant differences relative to traditional financial ETFs such as XLF.
This financial ETF is a smart-beta fund, not a cap-weighted product. FXO employs growth and value factors in its security selection process. Growth factors include price appreciation over various time frames, sales growth and sales-to-price while the fund’s value factors include book value and return on assets, among others.
FXO also is not as bank-heavy as rival financial ETFs. Insurance providers are FXO’s largest industry weight at almost 22% and just two of the fund’s top 10 holdings are pure play banks.
Invesco S&P 500 Equal Weight Financials ETF (RYF)
Expense Ratio: 0.4%
The Invesco S&P 500 Equal Weight Financials ETF (NYSEARCA:RYF) is an example of a financial ETF that is really struggling this year. Equal-weight ETFs do offer out-performance potential over cap-weighted rivals, but that has not been the case with RYF this year as the financial ETF is lower by 2.4%.
However, there is value in RYF. Literally. Nearly half of the financial ETF’s 67 holdings are classified as value stocks, and RYF trades at multiples that are attractive relative to the category average.
As is the case with the aforementioned FXO, RYF is not a bank-heavy ETF. This Invesco financial ETF allocates less than 27% of its weight to bank stocks and none of its top 10 holdings are banks. RYF devotes over a third of its weight to insurance companies, a group that has historically shown positive correlation to rising Treasury yields.
iShares Evolved U.S. Financials ETF (IEFN)
Expense Ratio: 0.18%
The iShares Evolved U.S. Financials ETF (BATS:IEFN) is a unique, actively managed approach to financial stocks. It is also inexpensive relative to actively managed sector funds. With an annual fee of just 0.18%, IEFN charges a fraction of what many actively managed sector mutual funds do.
IEFN is one of seven sector ETFs from iShares, the world’s largest ETF issuer, that employs artificial intelligence screens. This financial ETF employs machine learning, natural language processing and clustering algorithms in its security selection process. This financial ETF is about six months old and has traded modestly lower since its March debut.
IEFN’s methodology is undoubtedly unique, but its lineup is not necessarily a significant departure from traditional financial ETFs as JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC) and related fare are among the ETF’s top 10 holdings.
John Hancock Multifactor Financials ETF (JHMF)
Expense Ratio: 0.5%
Multifactor funds are a growing segment of the ETF landscape. Investment factors emphasized by the John Hancock Multifactor Financials ETF (NYSEARCA:JHMF) include smaller cap, lower relative price, and higher profitability.
There are advantages to a multifactor strategy, namely that historical data suggest timing individual investment factors is difficult. In plain English, factor leadership is not always as persistent as investors may want to believe, and multifactor funds remove the factor-timing burden.
JHMF’s debuted in late September 2015 and has managed steady out-performance of the broader financial category. Major contributors to this financial ETF’s 2018 upside include Visa Inc. (NYSE:V), Mastercard Inc. (NYSE:MA) and JPMorgan.
Invesco DWA Financial Momentum ETF (PFI)
Expense Ratio: 0.6%
As its name implies, the Invesco DWA Financial Momentum ETF (NASDAQ:PFI) is a momentum play on financial stocks, but the sector has yet to display much in the way of momentum this year.
PFI’s underlying index, the Dorsey Wright Financials Technical Leaders Index, “is designed to identify companies that are showing relative strength (momentum), and is composed of at least 30 securities from the NASDAQ US Benchmark Index. Relative strength is the measurement of a security’s performance in a given universe over time as compared to the performance of all other securities in that universe,” according to Invesco.
This financial ETF allocates over 38 percent of its weight to stocks considered growth names, which is high relative to other financial ETFs. Over half of PFI’s holdings are not large caps, which is also high compared to rival financial ETFs. Even with its momentum/growth, PFI’s annualized volatility over the past 12 months is below that of the cap-weighted XLF’s.
Banks and capital markets will need to drive PFI’s rebound because those groups combine for 60% of this financial ETF’s weight.
As of this writing, Todd Shriber owned shares of XLF.
