Financials have come a long way since the 2008 economic crisis. The performance of the financial sector has been storming back since then and has seen another solid performance so far in 2012 as well.
Still, the sector could be facing some headwinds thanks to Europe and their sovereign debt crisis as we approach 2013, suggesting that it isn’t all good news for the space. Nevertheless, there are some ETFs which may be able to weather the storm better than most, depending on their investment focus (For Financials, Look to These Top Zacks Ranked ETFs).
While financial ETFs are linked to many industries ranging from broad space to other niche industries, some are undoubtedly more insulated from shocks than others. In our opinion, one such industry that could be more immune than others is in the Real Estate Investment Trust (REIT) industry.
The U.S. REIT sector has been a very strong performer so far this year, driven by strengthening fundamentals for commercial real estate and an improving outlook for the U.S. economy despite some recent doubts. The uptrend in the diffusion index further suggests that economic growth is broadening across sectors and indicates a higher probability of a firmer foundation for future growth (The Introductory Guide to Real Estate ETF Investing).
Given the strong performance of this space so far this year, it is worthwhile to take a look at financial ETFs which have heavy concentration in the REIT industry. While there are certainly pure REIT ETFs that can be used, a broader approach could be ideal at this time, especially if other nations can get their economies in order.
Due to this, a diversified technique that leans on the REIT market could be an ideal way to target the financial sector. For these investors, we have highlighted two financial ETFs below that have maximum REIT exposure; KBWD and PSCF.
KBW High Dividend Yield Financial ETF (KBWD)
For investors seeking a REIT concentrated financial ETF, KBW High Dividend Yield Financial ETF is an intriguing choice. The REIT industry dominates the holding pattern of this ETF with more than 50% of the asset base going towards the sector. The product uses a dividend yield weighting methodology which produces a fund with a small basket of 36 stocks (Real Estate ETFs: Unexpected Safe Haven)
The companies qualifying for inclusion in the top 10 holdings are all from the REIT industry with just one exception, suggesting a relatively concentrated bet for investors. Besides 51% of the asset base going towards REITs, investors should note that around 46% comprise the top 10 holdings. So this plays a very influential role in the performance of the ETF (Time for a Commercial Real Estate ETF?)
Among individual holdings, Invesco Mortgage Capital Inc. takes the top spot in the fund, although no one security makes up more than 5.7% of assets. Among sector holdings, after REIT, banks qualify for the second highest allocation with asset share of 21%. Among others, it is just consumer finance which gets double-digit allocation in the fund.
The product also potentially provides a different market cap level of exposure as large caps account for just 10% of the total assets. Instead, micro caps make up roughly 24% while small caps make up nearly half of the total portfolio.
While style favors value stocks more with 70% value stocks, 22% pure value and just 8% growth stocks. So it seems that this ETF has a tilt towards undervalued stocks or stocks trading at a discount to their price.
As its name suggest and as per its weighting methodology, the fund has a handsome dividend yield of 9.66%. This makes it attractive for the investor seeking for current income in this ultra low rate environment (12 Ways to Earn High Yields with ETFs). However, this is a pretty expensive fund as it charges investors a fee of 1.32% annually.
So far this year, the performance of both the REIT industry and other financial sectors has been quite good which is reflected in the fund’s year-to date returns, which stand at 14.95%. Over a period of one year, the fund delivered a return of 10.95%.
PowerShares S&P SmallCap Financials Portfolio (PSCF)
Another ETF with heavy exposure towards the REIT industry is PowerShares S&P SmallCap Financials Portfolio. Although this ETF does not give the majority of its assets to the REIT industry among its sector allocation, a substantial 41% of the asset base is invested in the REIT industry.
The fund is linked to the S&P SmallCap 600 Capped Financials Index thereby avoiding big financial stocks. The fund is home to a large basket of 102 stocks. A look at the top 10 holdings suggests that although the fund prioritizes financials to REITs, the latter dominates the top 10 holdings pattern of the ETF. Investors should note that 8 out of 10 largest holdings in this ETF are from the REIT industry.
Among individual holdings, Extra Space Storage and Kilroy Realty Corp are given equal weighting in the portfolio (3.38%) while Tanger Factory Outlet, which occupies the third spot in the fund, is allocated 2.97% of the asset base. The majority of holdings are value stocks. For this exposure, the fund charges an expense ratio of 29 basis points (Is ROOF a Better Real Estate ETF?).
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