The biggest addition to the S&P 500 in terms of dollar value since the year 2000 took place last Friday, as Berkshire Hathaway B class shares (BRK.B) joined the index, weighing in at about 1.3% of the index total now.
Repercussions in the S&P Financials sector, proxied by XLF (SPDR Select Sector Financials), have BRK/B going from not even being a component of the ETF to a weighting of 8.44% literally overnight. Is this good, bad, or indifferent? It’s hard to say really, but one must note that since the rebalance was announced on January 26th, BRK/B has rallied over 13% with the S&P 500 losing over 1% during the same time frame. (Note: Two rebalances in Citigroup (C) occurred in 2009 which drove the stock to the high $4 and eventually even $5 only to quickly retreat back to the $3's, as noted by Michael Johnston of ETF Database here).
Indexers who invest directly in the S&P 500 have been forced to buy BRK/B, which has clearly driven up the price in the stock, making it the 4th largest holding in XLF. XLF currently has over $5 billion in AUM, and is not only used as a popular means of long exposure to the Financials sector by a wide variety of investors, retail and institutional, but larger institutional investors often use XLF as a hedging tool or to make bearish bets on the short side as well. This “new look XLF” has some larger institutional investors left trying to decide if they need to tweak their strategies because their exposure to the financials sector via XLF, long or short, has changed fairly dramatically overnight.
It is no coincidence that peripheral financial ETFs like KRE (SPDR Regional Banking) have become hard to borrow as shorts looking for better diversification in financials are looking outside of XLF right now in some cases. Larger holders seem concerned to a degree that BRK/B is such a large weighting in the ETF, and due to the recent run up in the stock due to the index rebalance, any setback in BRK/B stock performance in the near term could be a drag on the ETF's total performance. Alternatives in the Financials ETF space that go beyond Banking exposure (like KBW, KRE) and also give the investor exposure to the likes of diversified financial companies, broker/dealers, insurance companies, and REITs include VFH (Vanguard Financials).
VFH does not track the same index as XLF, but instead follows the MSCI Investable Market Financials and also owns BRK/B, but to a lesser degree, about 2.3% of the index. IYG (iShares Dow Jones U.S. Financials) does not own BRK/B so thus is an alternative to those who are wary of the recent rebalance. PFI (PowerShares Dynamic Financial Sector) does not own BRK/B either, and also has a relatively even spread across it’s portfolio as far as not being too concentrated in any given name, or set of names (STT is the highest weighted component at 2.75%). Those who like to use levered exposure in Financials, whether they are on the long or short side, should note that FAS (Direxion Financial Bull 3X Daily) and FAZ (Direxion Financial Bear 3X Daily) also do not own BRK/B, and thus can give you different exposure, as these ETFs are based on the Russell 1000 Financials Sector. This is important because many ETF traders seem to have the misconception that FAS and FAZ are simply 3X long or short bets on XLF and it’s not that simple.
For those looking to temper their exposure to BRK/B and it’s recent run up, but are inclined to stick with the S&P Financials index as their preferred way to get financials exposure in their portfolios (long or short), the closest matches to XLF right now from an underlying components standpoint are RYF (Rydex Equal Weight S&P Financials) and RWW (RevenueShares Financials Sector). Both ETFs own the same underlying securities as XLF, but the weighting mechanisms are much different, with RYF using an equal weighted method, ensuring that even BRK/B doesn’t become a heavy overweight in the portfolio regardless of where the short term market action takes the stock. RWW (RevenueShares Financials) owns the components of XLF according to their revenue in the context of the Financials index. So in this case, BRK/B is currently about a 1.1% weighting, and by owning RWW, like RYF you are still owning the same index as XLF from an underyling securities standpoint.
However you decide to play “the new XLF”, or one of its ETF competitors in the Financials space, one must be cognizant of the different underlying methodologies and indexes tracked by each product, and the weightings differences of the underlying holdings in each ETF comparatively, so you can do better than have generic “Financials” exposure in your portfolio but instead be able to adequately answer the question “Does this ETF provide me the exact (or close) exposure that I am looking for at the moment?”
The links below illustrate YTD performance for the ETFs mentioned:
Disclosure: No positions