Why The Financial ETF XLF Has Outperformed The Banks

| About: Financial Select (XLF)

I've heard a lot lately about ways to participate in the comeback that the banks and financials have experienced since late last year. I was interested in whether any names outperformed the sector average since the crash of last summer.

For the period from August 4, 2011 (an arbitrary date, near the beginning of the steep downturn) through February 13, 2012, I looked at the performance of the Select SPDR Trust Financials ETF (NYSEARCA:XLF) compared to the banks that were the top 10 holdings, as of January 31, 2012, as found on Yahoo Finance.

Financial Percent Gain/(Loss)
Wells Fargo (NYSE:WFC) 20.0%
JP Morgan Chase (NYSE:JPM) 2.6%
Citigroup (NYSE:C) (5.5%)
Bank of America (NYSE:BAC) (5.9%)
Goldman Sachs (NYSE:GS) (8.6%)
US Bancorp (NYSE:USB) 22.0%
XLF 8.5%

I was a bit surprised to find that the XLF outperformed some of the big banks in the top 10 holdings. Even more surprising was that there were only six banks in the top 10 holdings of the Financial ETF-- and that is counting GS as a bank.

The other four positions were filled by Berkshire Hathaway Inc. B Shares (NYSE:BRK.B), American Express Corp (NYSE:AXP), Simon Properties Group (NYSE:SPG) and MetLife Insurance (NYSE:MET)-- quite a collection of non-banks.

Berkshire is actually the third largest by market cap of the companies above, and is therefore weighted third in the XLF. It brought up the average with a return of 12.5%. The top 10 holdings make up just under 50% of the total holdings of the XLF.

I calculated the return of the six financials above only a couple of different ways.

  1. If you equal weight the six stocks over the period above, the return would be 4.1%.
  2. If you weigh by market cap, as the XLF does, the return would be 5.7%.

Both of these fall short of the return on the XLF, which includes smaller financials and some stocks that most wouldn't consider financials.

The takeaway? Investors should be clear on what they are buying. If I wanted to own a mixed fund, with insurance and real estate, I wouldn't buy an ETF called "financial"-- but that is what I would be getting in XLF. And just for comparison purposes, the SPDR S&P Insurance ETF returned 11.6% over the same period, also beating XLF.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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