By Shibo Liang
The last few weeks have been a rocky stretch for the financial sector in the U.S., with another massive bankruptcy filing coming as negative sentiment towards big financial institutions is reaching new heights. After a stellar month in October, a wave of risk aversion in November has dealt a blow to the financial sector, with steep losses piling up amidst ongoing Euro zone worries.
The largest and most popular ETFs in the Financials ETFdb Category are generally dominated by U.S. banks and financial institutions. But beyond those funds, there are a number of choices for investors looking to tap into the financial sector of international markets, believing this asset class may deliver some degree of insulation from the risk factors impacting U.S. banks in the current environment:
Global X China Financials ETF (CHIX)
This ETF offers exposure to the financial sector of China, which now includes some of the world’s largest banks. CHIX seeks to replicate the Solactive China Financials Index, a benchmark that includes about 35 individual holdings, including some real estate firms [see CHIX Holdings]. The portfolio is quite top-heavy; four firms, China Life Insurance, China Construction Bank, Industrial and Commercial Bank of China, and Bank of China, account for close to 40% of total assets. CHIX has an expense ratio of 65 basis points, and like all Global X ETFs is eligible for commission free trading on the Interactive Brokers platform.
CHIX has struggled this year as Chinese markets have fallen back and anxiety over the health of the global financial sector has intensified; this fund is down close to 20% on the year.
iShares MSCI Europe Financials Sector Index Fund (EUFN)
This ETF offers exposure to the financial sector of Europe including banks, diversified financial companies, insurance companies, and real estate companies. The top ten assets from a total of 111 holdings, account for close to half of the entire portfolio. This ETF falls on the lower end of the cost spectrum, featuring an expense ratio of 0.48%. Five countries that dominate this portfolio are the United Kingdom, Switzerland, France, Spain, and Germany.
The financial sector in Europe has been volatile over the past year and especially in recent months. Investors should carefully consider the impacts of the Euro-debt crisis and the outcomes of decisions made by European leaders.
SPDR S&P International Financial Sector ETF (IPF)
This ETF offers access the financial sector of developed global markets outside of the United States. IPF features a well balanced portfolio with no major concentrations in any one holding. The depth of this portfolio can also be advantageous as IPF holds a total of 133 individual securities. This fund charges an expense ratio of 0.50%, and allows for investors to gain global exposure to the financial sector.
Although this fund offers exposure to many countries across the globe, exposure is tilted towards the United Kingdom, Canada, Japan, and Australia.
Global X Brazil Financials ETF (BRAF)
This fund tracks the Solactive Brazil Financials Index, which includes companies that have their main business operations or are domiciled in Brazil. This ETF offers a diversified exposure to the sub-sectors of the financial industry with around 40% in banks, 30% in real estate firms, 20% in financial services companies, and the remainder in insurance. Investors should be aware of this shallow portfolio as BRAF holds a total of 26 individual holdings [see Brazil ETFs: Nine Ways To Play]. This ETF is also quite top-heavy, seeing as how the top ten holdings account for roughly 70% of total assets.
iShares MSCI Emerging Markets Financials Sector Index Fund (EMFN)
This ETF offers investors access to the financials sector of emerging markets. China, now home to some of the largest banks in the world, accounts for a quarter of the allocations in this fund. EMFN features an expense ratio of 0.69%, which is relatively high compared to other financial ETFs.
Emerging markets financial firms are, in many cases, quite different from their U.S. peers. These companies still are positioned to benefit from a rapidly growing customer base, as ongoing urbanization in China, India, and other developing economies is contributing to a growing middle class. As such, the companies that make up EMFN may focus more on traditional lending operations and less on exotic financial instruments–which might be welcome news to some investors.
EGShares Financials GEMS ETF (FGEM)
This ETF also offers exposure to banks and financial services companies in the emerging world; FGEM tracks the Dow Jones Emerging Markets Financials Titans Index, which consists of about 30 individual stocks. While EMFN and FGEM both tap into the financial sector of developing economies, these products are far from identical. In addition to the difference in depth of holdings (EMFN has about 100 component stocks), the country breakdown is a bit different as well. A significant chunk of the portfolio of FGEM is concentrated in the Asian emerging markets; China accounts for over one third of total holdings.
FGEM is part of the suite of ETFs from EGShares that excludes “quasi-developed” markets such as South Korea, which receives a meaningful weight in EMFN.
PowerShares KBW International Financial Portfolio (KBWX)
This ETF offers investors access to approximately 60 non-U.S. financial companies, tracking the KBW Global ex-U.S. Financial Sector Index. Although the fund has a rather shallow portfolio, it is very well balanced; no individual holding accounts for more than 5% of total assets. From a geographic perspective this ETF is focused on Europe, Latin America, and Canada [see KBWX Holdings].
KBWX falls on the cheaper end of the cost spectrum, featuring an expense ratio of 0.40%. The fund’s unerlying portfolio offers exposure to both developed and emerging markets.
iShares MSCI Far East Financials Sector Index Fund (FEFN)
This ETF provides exposure to the Far East region including banks, diversified financial companies, insurance companies, and real estate companies. A total of 85 holdings provides this portfolio with some depth [see FEFN Fact Sheet]. The three countries that make up this portfolio are Japan, Hong Kong, and Singapore. FEFN holds fewer than 100 holdings and the top ten individual securities account for close to half of total assets, potentially increasing the company-specific risk associated with this product. The moderate expense ratio at 0.48% puts this ETF in the middle of the cost spectrum when compared to others offerings in this sector.
iShares ACWI ex-U.S. Financials Sector Index Fund (AXFN)
This ETF tracks the MSCI All Country World ex USA Financials Index, a free float-adjusted, market capitalization weighted index. The fund provides exposure to both developed and emerging market countries excluding the United States. The depth of this portfolio stands out at 285 individual holdings. This allows for a very well balanced allocation, seeing as how the top ten holdings account for less than 20% of total assets. In terms of breakdown by country, the top four allocations include: Canada, United Kingdom, Australia, and Japan.
Disclosure: No positions at time of writing.
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