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For Financials, Look to These Top Zacks Ranked ETFs

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After enduring overwhelming recessionary shocks during the sub prime crisis of 2008, the financial sector of the U.S economy has recovered quite well. Even though the sector has posted strong numbers for the past two earnings seasons, the current tepid global economic environment poses a serious threat to the topline revenue and profitability of the financial sector.

Still, the financial sector has been a top performing sector so far this year, both in terms of earnings as well as stock market performance. However, risks still remain thanks to ongoing European worries and some uncertainty over the Fed’s action plan going into 2013 (read Long Term Treasury ETFs: Ultimate QE3 Play?).

Also, due to the generic slowdown, asset (loan) growth seems to be a drag on the banking industry. Amidst all this, the markets are filled with a risk aversion climate which has caused them to shift focus to safer investment avenues, such as Treasury Bonds.

Nevertheless, it is prudent to note that the financial sector is highly correlated with the broader economic trends, and any slight improvement in the economy could mean good news for the sector, suggesting that investors look to top ranked ETFs in this segment for continued outperformance heading into the final quarter of the year (see 4 International ETFs Yielding more than 5%).

About Zacks ETF Rank

A look to top ranked financial ETFs can be done by using the Zacks ETF Rank. This technique provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors as well. 

The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, Zacks Rank reflects the expected return of an ETF relative to other ETFs with similar level of risk.

Using this strategy, we have found two ETFs which are Ranked 2 or ‘Buy’ with this model:

PowerShares KBW Bank ETF (KBWB - Free Report)

Launched in November of 2011, PowerShares KBW Bank ETF (KBWB - Free Report) seeks to track the pre expense price and yield performance of the KBW Bank Index. The index is maintained and weighted by Keefe, Bruyette & Woods, Inc.

The benchmark is modified capitalization weighted adjusted for free float and measures the performance of U.S. listed banks and money centers.

It is a passively managed exchange traded fund (ETF) designed to deliver the return of the banking industry in the Financial Sector of the U.S equity markets. KBWB provides an aggressive exposure in the banking industry of the broader U.S. financial sector.

Since its inception, the ETF has amassed $211.39 million in assets, making it a reasonably popular choice for investors (read Are Foreign Financial ETFs Back on Track?).

This ETF is appropriate for investors looking for concentrated exposure in the U.S. financial sector. KBWB is a cost-effective choice for investors as it only charges 35 basis points per annum in fees and expenses compared to a category average of 0.58%.

The ETF focuses on large cap mainstream banks as well as regional banks and money centers. The fund currently holds a fairly small portfolio of 24 securities in all and allocates 60.71% of the total assets in its top 10 holdings.

Bank of America Corp (7.83%), U.S Bancorp (7.82%), J.P Morgan Chase & Co (7.60%), Citigroup Inc (7.12%) and Regional Financial Corp (5.06%) are some of its top holdings.

After a brief correction in its prices in the month of June 2012, KBWB is trading at attractive valuations with a PE below 12 and price/book below 0.9. KBWB has posted impressive returns of 22.33% since its inception as of 31st August 2012.

RevenueShares Financials Sector ETF (RWW - Free Report)

RWW seeks to outperform the financial sector of the S&P 500 Index before fees and expenses. It does this by investing in financial stocks that are within the S&P 500 benchmark, but weighting them based on revenues instead of market capitalization.

The ETF was launched in November of 2008 and has an asset base of around $10 million. It charges investors 0.49% as an expense ratio, compared to a category average of 0.58%.

RWW also pays out a paltry yield of 0.92%, largely thanks to a focus on low margin financial firms that aren’t exactly yield kings. The ETF being a function of the large cap financial stocks was negatively impacted during July last year; however, it has recovered well since the beginning of 2012 (see more in the Zacks ETF Center).

RWW has returned 13.60% for the one year period as on 31st August 2012. The ETF holds 82 securities in all with 61% of its total assets in the top 10 holdings.

Berkshire Hathaway Inc, (10.18%), J.P.Morgan Chase & Co (8.43%), Bank of America Corp (8%) and Citigroup Inc, (7.68%) are some of its top holdings.

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