By The ETF Professor, Benzinga Staff Writer
The allure of "ex" ETFs, or those funds with names that imply a particular sector or country is intentionally excluded, is easy to explain. All an investor that is looking to dodge financials for Japan needs to do is to find an ETF that is ex-financials or ex-Japan.
Exclusionary practices used by select ETFs have proven rewarding for investors. Consider a comparison of the WisdomTree Dividend ex-Financials Fund (DTN) and the Vanguard Dividend Appreciation ETF (VIG).
Clearly, the WisdomTree Dividend ex-Financials Fund excludes financial services stocks from its lineup. In defense of the Vanguard Dividend Appreciation ETF, that fund's weight to financials is relatively small at 6 percent, but even that small difference contributes to a performance gap between the two funds. In the past three months, as bank stocks have been battered, DTN has outperformed VIG by about 70 basis points.
That is just one example, but there are other compelling "ex" ETFs to consider.
WisdomTree Asia-Pacific ex-Japan Fund (AXJL) Taking a pass on Japanese stocks has been sound advice. In the past year, the iShares MSCI Japan Index Fund (EWJ) has slid 10.5 percent. The exclusion of Japan from AXJL's lineup has helped the ETF drop less than 8.8 percent over the same time.
AXJL amounts to a good news/bad news story. The good news is it is an Asia-focused ETF that offers no exposure to Japan. The bad news is Asia's equity markets have been punished at the hands of the European sovereign debt crisis and investors moving away from riskier assets. Australia, Hong Kong and Singapore account for about half of AXJL's weight, but the other half has a distinct emerging markets flare. That is clearly working against the ETF in the current environment.
WisdomTree International Dividend ex-Financials Fund (DOO) The Moody's Investors Service downgrades of 15 major global banks reminds investors that many large-cap financial services stocks remain controversial and beholden to substantial headline risk. As DTN does with U.S. stocks, DOO helps investors avoid bank stocks while gaining international exposure.
It is a plus that DOO is not heavily allocated to bank stocks, but the fund's country exposure is problematic. The ETF features 18 countries in its lineup, but 48 percent of that weight goes to eurozone nations. That helps explain why DOO has only slightly outperformed the Vanguard MSCI Europe ETF (VGK) in the past 90 days.
iShares MSCI ACWI ex US Consumer Staples Sector Index Fund (AXSL) Considering the flight to consumer staples stocks forced by the market's risk off tenor, the iShares MSCI ACWI ex U.S. Consumer Staples Sector Index Fund is a fine example of an ETF that flies under the radar. Investors have preferred more popular staples funds such as the Consumer Staples Select Sector SPDR (XLP), a notion highlighted by the fact that AXSL is almost two-years-old but has just $3.1 million in AUM.
Small size aside, AXSL's time to shine may be now. XLP was rocked by earnings warnings from a pair of its constituents last week. Those warnings have come courtesy of Procter & Gamble (PG) and Philip Morris (PM), which combine for 23 percent of XLP's weight.
Neither of those stocks is found in AXSL, but the iShares fund does have one negative: It is thinly traded with average daily volume of less than 500 shares per day.
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