Vanguard Financials ETF Offers a Great Way to Sidestep Volatility

by Ted Leinbach

Beaten-down bank stocks got a much-needed lift last week when the CEOs of Citigroup (NYSE: C) and Bank of America (NYSE: BAC) announced that both institutions were profitable for the first two months of this year. The market has been quick to recognize these statements as positive signs of encouragement about the U.S. financial system. They responded with a three-day rally that boosted the Dow Jones Industrials nearly 10 percent.

But despite this positive news, we are not going to say that the worst has passed, nor are we simply going to dive back into these individual banking stocks. Instead, we are going to take a more conservative approach to play what just may be the next banking rebound by spreading around our capital.

We are going to buy the entire financial sector with one well-diversified investment: The Vanguard Financials ETF (NYSE: VFH). This exchange-traded fund tracks the performance of MSCI US Investable Market Financials Index. It gives you access to more than 500 large, mid-size, and small banks, including bellwethers like Goldman Sachs (GS) and JPMorgan (JPM).

The best part about this investment is that it takes all of the risk out of owning risky individual banking stocks like Citigroup and spreads it around. Therefore, you can capture the entire long-term upside of the financial sector with just one move, while sidestepping the volatility.

For example, just last week, VFH jumped $3.88, or 29% on the positive news. That means that it is hovering well above its 52-week low of $13.07, and climbing steadily higher.

One of the other big reasons why we like this ETF is because VFH has a very low expense ratio of .2% on shares that are held for less than one year.

Bottom-line: VFH is a low-risk way to play the banking rebound. And over the next 18 months as the recovery moves forward, those willing to get their feet wet in the financial sector will be rewarded by their investment.

Comments

[Mad Hedge F...:]

Well researched article. This could be the year of the Exchange Traded Fund (ETF), which was one of the few growth products in an otherwise disastrous year for the brokerage community. Asset allocators are attracted by the ability to make single sector bets, like in the USO (oil), leveraged short plays that would otherwise be banned, like TBT (200% short long Treasuries), and low fees. The only thing missing is liquidity, which is still inadequate in all but a few of the biggest funds. There is now thought to be $400-$500 billion invested in these funds, compared to $4 trillion plus in mutual funds, and the rate of innovation is accelerating. The early entrants in the field, like Vanguard and Barclays Bank, are raking in the cash, leaving more conservative families of funds like Fidelity in the dust. Expect to start seeing more ETF’s in your 401K’s and pension holdings.

Mar 18 09:04 PM