3 financial ETFs to own today

Diversification is the name of the game, and that includes regional banks that will benefit if interest rates rise.

By Benzinga Jul 24, 2013 1:16PM

The financial sector has been no slouch in 2013, easily outperforming the S&P 500 with a gain of 25%. That is, if you use the Dow Jones US Financial Index as the benchmark.


However, there is more to the finance sector than the big names that most investors are familiar with.


By diversifying money allocated to the financial sector across more than just the JPMorgans (JPM) or Goldman Sachs' (GS) of the world, an investor will lower risk and, if done right, could potentially increase reward.


This will take some thinking outside the box and the willingness to add several ETFs versus just one.


The SPDR Select Sector Financial ETF (XLF) is a diverse basket of 84 stocks that spread across insurance (26%), financial services (24%), commercial banks (18%), and capital markets (13%).


That being said, the top ten looks like a "who's who" of the finance world. Top holdings include Well Fargo & Co. (WFC), Berkshire Hathaway (BRKB), JPMorgan and Citigroup (C).


The ETF is trading at the best level in nearly five years and is having a solid year, up 27%. However, it does not give investors the exposure they should have to the entire financial sector.


Slightly outperforming XLF this year is the iShares Dow Jones U.S. Regional Banks ETF (IAT) with a gain of 29%. The basket of 58 stocks is heavily weighted towards two stocks, US Bancorp (USB) and PNC Financial Services Group (PNC).


The remaining regional banks give investors exposure to the U.S. banking industry that could do well if interest rates increase.


The major difference between the regionals and the mega-cap banks is the international exposure and risk. The regional banks are more concentrated on the U.S. banking sector that deals with deposits and mortgages versus extremely complex financial instruments. As interest rates increase, it could lead to an increase in deposits at the regional banks and a larger spread that should boost the bottom line.


If more risk is the name of the game, then the iShares Dow Jones U.S. Broker-Dealers Index ETF (IAI) could be an option. The niche ETF only has 22 stocks with the sole concentration being companies that offer investment services. The top holdings are Goldman Sachs, Morgan Stanley (MS) and Charles Schwab (SCHW).


With a gain of 34% this year, it has positioned itself as a leader in the financial sector. As long as the risk-on trade continues to be the overall strategy and equity markets hit new highs, money should continue the flow into the sector.


The perception of most investors is that one financial ETF will cover all bases, but this is not true. An investor could realistically own all three ETFs mentioned above and expect very different returns from year-to-year.


The market will dictate which of the three should be owned at any time. Today all three are positioned to move higher for their own reasons and investors could consider the trifecta heading into the end of the year.


More from Benzinga

0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

108
108 rated 1
257
257 rated 2
439
439 rated 3
626
626 rated 4
499
499 rated 5
530
530 rated 6
713
713 rated 7
522
522 rated 8
339
339 rated 9
136
136 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
UPLULTRA PETROLEUM Corp10
EOGEOG RESOURCES Inc10
SWNSOUTHWESTERN ENERGY COMPANY10
TAT&T Inc9
COPCONOCOPHILLIPS9
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.