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Much like in the past, financials have been a sector to avoid this year as a number of issues plagued the space. Concerns over European exposure have dominated the industry for the past few months causing many of the biggest banks in the nation to slump once again heading into the winter. Rumors of stress tests to large institutions haven’t helped dismay these fears, and have caused many to wonder if financials are setting themselves up for another bailout situation in the near future. Unfortunately for the sector, government support, thanks to staunch Congressional disapproval and widespread protests, looks to be limited—if not non-existent—this time around, making an investment in big financials a tough pill to swallow (read German Bond ETFs In Focus).

Yet for those seeking to maintain a well-diversified portfolio, complete avoidance of the financial sector seems unwise, especially if the market comes back to normal in months ahead. Furthermore, many corners of the financial market are not nearly as impacted by these European concerns as their big bank counterparts. This suggests that while they may have been beaten down by the weak economy, they could be due for a surge in months ahead as more investors realize how cheap some of these securities have become. For those subscribing to this idea, a closer look at First Trust’s NASDAQ ABA Community Bank ETF (QABA - ETF report) could be warranted.

QABA In Focus

QABA seeks to track, before fees and expenses, the NASDAQ OMX ABA Community Bank Index which is a financials-based equity benchmark that takes a novel approach to investing in the sector. The fund includes the common stock of all NASDAQ listed banks and thrifts, or their holdings companies, that are designed as banks by the ICB. However, the benchmark excludes any of the 50 largest organizations in this group based on asset size, as well as any firms that have an ‘international specialization’ or a ‘credit-card specialization’ as determined by the most recently available call report data as compiled by the FDIC. This approach ensures that many of the big banks that dominate other, more popular ETFs in the space are excluded from the fund and that the product has a very different risk/reward profile than many of its peers (read The Yield King Of Leveraged ETFs).

As a result, holdings in this ETF are not firms such as Bank of America or Citigroup, but rather People’s United Financial (PBCT - Analyst Report) and BOK Financial Corporation (BOKF - Analyst Report), along with about 100 other small-cap oriented banking institutions. In fact, the median market cap of the fund is just $543 million while the maximum market cap for any one security is just under $5 billion, suggesting that the product has a heavy tilt towards pint-sized securities. Investors should also note that thanks to concerns over the broad industry, valuation statistics on the product have fallen to rock-bottom levels. The P/E is below 5.6 while the Price-to-Book ratio is approaching 1.0, suggesting that the fund is trading at very favorable levels for those that are in it for the long term.

Thanks in part to this deep value, as well as the heavy concerns impacting big banks but not their more community-focused cousins, QABA has also outperformed more popular and larger cap focused securities on the year. In year-to-date terms, QABA has lost 17.6% while (XLF - ETF report) has fallen by 26.1% in the same period. Furthermore, over the past three months as concerns over European exposure have really come to a head, XLF has fallen by about 7.8% while QABA has gained 0.5% in the same time frame.

This should show investors that while the standing of the financial sector isn’t exactly great right now, it is far from uniform across the space. While big banks like (BAC - Analyst Report) and (C - Analyst Report) may be struggling, and in some cases, fighting for their lives, the same isn’t true in the community bank space. Many of these securities are doing quite well and, in fact, are still trading at deep values. This suggests that for investors seeking to gain exposure to the financial corner of the market this small-cap focused QABA could be the way to go, both as a way to avoid some of the sector turmoil and as method to keep portfolios well diversified across sector lines.

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