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Best Financial ETFs for This Market Slump

Sweta Killa

The U.S. stock market has seen choppy trading over the past few weeks thanks to renewed geopolitical tensions in Ukraine, Russia and the Middle East. Further, growing speculation over the interest rate hike sooner than expected, slowdown in China and struggling European economy are weighing heavily on global growth (read: Play Goldman's Bearish Call with These ETFs).

As a result, investors are dumping riskier assets including financials and praising defensive sectors. Notably, the S&P Financial Select Sector SPDR Fund (XLF) lost 0.35% in the trailing one-month period compared to a loss of 0.18% for the broad U.S. market fund (SPY).

This is because lackluster activities at both household and corporate, high frequency trading concerns, increased regulatory scrutiny, sluggish mortgage banking activities, and a weak capital market business continue to dampen growth in the financial sector, which accounts for around one-fifth of the S&P 500 index alone.

Even a string of earnings beat by the major banking companies failed to infuse optimism into the sector. In particular, financials recorded weak earnings growth in Q2, trailing Auto (read: Banking Earnings Beats Fail to Boost Financial ETFs).

Amid this backdrop, a handful of financial ETFs have shown strong resilience to the sharp downturn in the financial space and are easily crushing the broad market fund. This is especially true as investors flocked to some stocks in the wake of robust dividend payments. The financial sector topped the list of largest dividend payers in the second quarter after utilities with annual dividend growth of 17.6%. About 88.5% of the companies in the financial sector paid dividends in the first half.

Below, we have highlighted three ETFs that are still in green and worth a look given that the current turmoil will likely continue in the days ahead.

iShares US Broker-Dealers ETF (IAI)

This fund provides exposure to the investment services corner of the broader financial sector of the U.S. economy by tracking the Dow Jones U.S. Select Investment Services Index. The product holds 22 stocks in its basket with the largest allocation going to Goldman Sachs (GS), Morgan Stanley (MS) and Schwab Charles (SCHW). These three firms collectively make up for one-fourth share in the basket (see: all the Financial ETFs here).

The product is rich in AUM with nearly $220.5 million and sees moderate average daily volume of more than 85,000 shares. Expense ratio came in at 0.43%. The fund gained 2.3% in the trailing one-month period and has a decent yield of 1.31% per annum. IAI has a Zacks ETF Rank of 3 or Hold’ with High risk outlook.

PowerShares KBW Capital Markets Portfolio ETF (KBWC)

This ETF follows KBW Capital Markets Index, which measures the performance of the companies that do business as broker dealers, asset managers, trust and custody banks or exchanges. It has amassed about $4.9 million in its asset base while volume is very light, probably increasing the total cost for this unpopular fund beyond the expense ratio of 0.35%.

Holding 24 stocks in the basket, the product is largely concentrated on the top five firms, accounting for over 41% of the total assets. MS, BlackRock (BLK) and SCHW are the top three holdings. The ETF has added about 1.6% in the same period and has a decent annual dividend yield of 1.37%. It currently has a Zacks ETF Rank of 4 or ‘Sell’ rating with a Medium risk outlook.

PowerShares KBW High Dividend Yield Financial Portfolio (KBWD)

This fund provides exposure to the highest dividend-yielding stocks of the broad U.S. financial space, including banking, insurance, and diversified financial services. It tracks the KBW Financial Sector Dividend Yield Index and holds 38 securities. Unlike the other two, the ETF is pretty spread out across each component as each security holds less than 5% of assets (read: 4 Overlooked ETFs with Double-digit Yield).

KBWD has good $262.1 million in AUM and charges a higher annual fee of 1.55%. The cost of overall trading could rise as the fund trades in low volume of around 54,000 shares a day. The ETF added 0.7% in the past month and has an impressive dividend yield of 8.22%. These returns are much more than the total cost. The fund has a Zacks ETF Rank of 4 with a Medium risk outlook.

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Read the analyst report on XLF

Read the analyst report on SPY

Read the analyst report on IAI

Read the analyst report on KBWC

Read the analyst report on KBWD


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