Financial ETF Review: Top Performers Last Week

Nick Perry (Schaeffer's Investment Research) submits: Given the bounce in financials this past week, I thought it might be interesting to delve into some of the ETFs in that area. Of the financial funds on my list, the 3 main ETFs that I follow are Dow Jones U.S. Financial Sector Index Fund (IYF), the Financial Select Sector SPDR (XLF), and the Regional Bank HOLDRS (RKH). (I know that some will argue that HOLDRS are "technically" not ETFs, but they are close enough for my purposes.)

The iShares site shows the Dow Jones U.S. Financial Sector Index Fund is comprised of these top sub-sectors: banks (41%), general financial (25%), nonlife insurance (16%), and real estate (10%). The Financial Select Sector SPDR's fact sheet shows it is made up of: diversified financial services (24%), insurance (23%), commercial banks (18%), capital markets (17%) and thrifts & mortgage finance (7%). And, a check of the HOLDRS site shows the Regional Bank HOLDRS is, well, comprised mostly of banks.

While these ETFs have different weightings at the individual stock level, and I am a big believer in understanding the weightings, I think it is worth pointing out that these funds all tend to move together. Pairing them up together shows very high correlations with each other and the year-to-date returns are fairly close. To illustrate the similarities in movement, check out the weekly charts below.

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A side-by-side comparison like this really highlights how closely these funds track each other. While there may be a few slight deviations in the charts, the overall patterns are extremely similar. That would be my first point to note about the financial ETFs - unlike some groups, these tend to move as a pack. That is worth noting to me because it saves me from trying to track each one - if I have seen one financial ETF chart, I have seen them all. Okay, that might be a slight exaggeration, but you get the idea.

The second takeaway for me is that this morning's move by the Fed to cut the discount rate came at a key time for the financial sector. These ETFs have been hit hard over the last month and a half and have now pulled back to levels that marked support in the past. The funds are down for the year and showing only a slight gain from where they stood at the beginning of 2006. As of 8/15/2007, the financial sector was the top-weighted group of the SPDR S&P 500 ETF (SPY), so some stabilization here is important.