It is the second-largest sector weight in the S&P 500 and perhaps the one that is still the most controversial. Given those points, it is easy to understand why many investors, when pressed, could name at least ETF that tracks the financial services sector.
The ETFs to be named would probably be the Financial Services Select Sector SPDR (NYSEARCA:XLF), the Vanguard Financials ETF (NYSEARCA:VFH) or another one of the legitimately popular funds. In other words, it might come as a surprise to some that it is entirely possible for an ETF tracking financial services names to lead a low fanfare existence.
It is possible, but as is the case with so many other sector funds that do not command the attention their larger counterparts do, the following financial services ETFs are worthy of consideration for investors' portfolios.
First Trust Financials AlphaDEX Fund (NYSEARCA:FXO) Home to $215.6 million in assets under management and average daily volume north of 247,000 shares, the First Trust Financials AlphaDEX Fund is by no means obscure. It is merely smaller and less heavily traded than larger funds such as XLF and VFH.
Importantly, FXO does over a credible alternative to more heralded bank ETFs because of the AlphaDEX methodology, which goes beyond traditional cap-weighting found in so many sector and broad market ETFs.
That means FXO's constituents are screened on "growth factors including three, six and 12-month price appreciation, sales to price and one year sales growth, and, separately, on value factors including book value to price, cash flow to price and return on assets," according to First Trust. Importantly, FXO is home to 164 stocks, twice as many as XLF, and the former allocates no more than 1.33 percent to any of its individual holdings. Those factors give FXO a quasi-equal weight approach and helps investors dodge excessive weightings to the usual suspects of the banking sector such as Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC). FXO has returned over 21 percent in the past year.
PowerShares S&P SmallCap Financials Portfolio (NASDAQ:PSCF) The PowerShares S&P SmallCap Financials Portfolio tracks over 100 stocks parsed from the S&P SmallCap 600 Index, but it is worth noting that this is not strictly a bank stock ETF. In fact, just one of the ETF's top-10 holdings and two of the top-20 are true bank stocks.
Rather, PSCF is heavily allocated to small-cap real estate investment trusts. The fund is also not 100 percent allocated to small-caps as it devotes about 14 percent of its weight to mid-cap names. As an income play for investors who are not risk-averse, PSCF is worthy of some consideration because the fund has a 6.5 percent distribution yield.
Distribution yield is calculated by dividing the ETF's most recent distribution, in this case almost 52 cents per share on December 31, and dividing it by the fund's net asset value on that date, according to PowerShares. Investors will pay up for PSCF a bit as the ETF features a P/E ratio of almost 23.
Market Vectors Bank and Brokerage ETF (NYSEARCA:RKH) Average daily turnover of about 27,300 shares for RKH may seem off-putting to volume fanatics, but two things are worth noting here. First, the ETF is home to just 26 stocks and none of the top-10 holdings (59.3 percent of the ETF's weight) can be considered thinly traded. Those names include HSBC (HBC), J.P. Morgan Chase (NYSE:JPM) and Citigroup (NYSE:C).
Second, RKH is up 27.3 percent in the past year, meaning this often overlooked fund has slightly outperformed both XLF and VFH. The key to RKH's 2013 potential upside is obvious. This fund is not solely U.S-focused. Rather, U.S.-based banks account for just 38.2 percent of the fund's weight.
European, be they U.K.-based, Spanish, Swiss or others, represent over 34 percent of RKH's total weight. Some of those names surged in 2012 and will have to deliver in the form of less controversy and higher dividends this year to please investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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