A financial ETF for weak earnings

This fund's strength lies in its diversified portfolio, which could help investors weather potentially disappointing results from banks.

By TheStreet Staff Jul 13, 2011 11:05AM

By Don Dion, TheStreet


While it can be an exciting time for stock pickers, earnings season is also an alluring period for those with a focus on ETFs. Many of the top components of popular indexes will report their earnings and provide outlooks in coming weeks.


On Monday, Alcoa (AA) kicked things off, reporting that its profit more than doubled during the most recent three-month period. While its numbers set a positive tone, investors must continue to exercise caution under current market conditions.


Next up will be Wall Street giants JPMorgan (JPM) and Citigroup (C). As investors have witnessed throughout the opening half of 2011, the markets have not been kind to the financial industry.


With European debt issues in the headlines and investors concerned about the domestic debt ceiling discussions and strength of the broader economic recovery, many of these major financial intuitions have trudged lower, struggling to find support.

Given their shaky performance heading into earnings season and the pressing factors facing much of globe at this time, it is not surprising that the sentiment among analysts heading into the next few days is subdued.


A Wall Street Journal article Wednesday notes that "analysts don't expect second-quarter earnings to offer much to write home about." Clearly, there are many questions facing the financial industry and, looking ahead, this sector may not be the most ideal destination for the faint of heart.


While the sector may be best avoided by conservative investors until clearer skies prevail, those with a stomach for risk may find the resounding uncertainty facing the banks attractive. In this case, there are a number of ways investors can cautiously take on exposure to this industry. The SPDR KBW Bank ETF (KBE) has long been one of my favorites.


Designed to provide investors with expansive exposure to the financial industry, KBE spreads its assets across all reaches of the financial sphere, tapping into a diverse combination of Wall Street kings and smaller regional banks.


The fund is a particularly strong play for investors interested in this week's earnings calendar. JPMorgan and Citigroup, the fund's two largest positions, together account for 15% of its total assets.


As I noted in this morning's video, investors with a desire to add KBE to their portfolios would be best off waiting until the initial reaction to JPMorgan and Citi's earnings have subsided before diving in.


These numbers will not only provide insight into the state of the two firms, but also set the bar for other big finance names set to report in the weeks ahead. Next week, firms including Bank of America (BAC), Wells Fargo (WFC) and Suntrust Banks (STI) will face the spotlight as well. These firms sit alongside JPM and C within KBE's top ten holdings.

Although some may find the industry to be an attractive against-the-grain bet in this earnings season, this is not a sector I would encourage any investor to go all in on. There are ample headwinds facing U.S. banks at this time and therefore even the most risk tolerant investors should keep any exposure to individual firms or ETFs like KBE small and focused in order to protect against the threat of a shake-up.


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