While the market continues to churn higher in 2012, financials
remain one of the riskiest sectors for a variety of reasons. The
PIIGS debt debacle remains an ever present worry and with concerns
beginning to build over Spain we could see more volatility in the
sector in months ahead.
Despite this, financials have easily been one of the best
performing sectors in the market so far this year, outpacing the
returns of many of the more stable counterpart industries. From a
U.S. perspective, the Financial SPDR (XLF) is
currently the best performing sector ETF in year-to-date terms,
crushing the S&P 500 by nearly 750 basis points in the time
frame (see Three Financial ETFs Outperforming XLF).
However, when looking at the trailing 52 weeks instead,
financials are among the three worst performers only beating out
energy and materials over the past year. This suggests that
financials continue to be an extremely volatile sector and that the
space can often be one of the biggest movers in a specific time
frame.
This trend can be even more magnified when investors look to the
international space instead. This is because these securities can
have more exposure to European markets or have a greater focus on
emerging economies. In either case, they can experience greater
levels of movement then their U.S. large cap focused peers.
Thanks to this, these securities can make for interest plays on
an economic recovery or an increase in risk appetite across the
board. However, they can also big losers when markets turn south,
suggesting that these volatile securities can be interesting picks
for traders in the financial ETF space (read Top Three High Yield
Financial ETFs).
For investors seeking to make a play on this risky segment of
the market—either long or short—a closer look at some funds which
have high standard deviation levels could be in order. These funds
tend to move much more than their peers and thus can be some of the
biggest winners—or losers—when markets are experiencing outsized
levels of volatility.
PowerShares KBW International Financial Portfolio
(KBWX)
This ETF tracks the S&P North American Technology Sector
Index which is a benchmark of global companies that are engaged in
the business of providing financial services and products across a
variety of business lines. Currently, the ETF holds 57 securities
in its basket and charges investors 40 basis points a year in
fees.
The financial ETF has a one year standard deviation of 54.83%,
nearly sixty percent higher than XLF’s metric. This comes despite
the fund focusing heavily on blend securities and large caps from a
variety of developed and emerging nations.
The volatility is likely coming from the significant European
allocation in the fund as the continent makes up close to 40% of
the total. This is led by a 13% allocation to Spain and a 10%
holding in British financial institutions as well (read Three Low
Beta Sector ETFs).
So far in 2012, the ETF has gained a respectable 11%, although
this performance has been less impressive than others in the space.
However, the ETF does pay out a solid yield of nearly 2.7%,
comparable to other financial ETFs.
iShares MSCI Far East Financials Sector Index Fund
(FEFN)
This ETF gives investors concentrated exposure to the financial
segment of companies based in the Far East. The product has close
to 78 holdings in its basket and it charges investors 48 basis
points a year in fees.
Like other products on the list, the one year standard deviation
for this fund is above 50%, signaling high levels of volatility.
This is somewhat surprising given the product’s focus on large caps
and value stocks which comprise the bulk of the portfolio (see Five
Cheaper ETFs You Probably Overlooked).
Furthermore, the countries that the fund focuses on are pretty
strong and developed as Japan (57%), Hong Kong (21%), and Singapore
(13%) take the top three spots. However, this also pushed the fund
into securities denominated in a variety of currencies including
nearly 60% in yen. Thanks to this and the volatility of the
currency market as of late, it shouldn’t be too surprising that the
fund has such a high standard deviation.
Furthermore, investors should note that the product has a heavy
component in the real estate segment, as close to one-fourth of
total assets goes to this space. Beyond this, however, there is
close to 40% in banking and 14% in insurance firms, suggesting a
reasonable mix of firms.
This financial ETF has performed quite well so far in 2012,
adding nearly 21.2% in the time period. This, along with the 30 Day
SEC Yield of 4% compares favorably to many other
internationally-focused ETFs in the space. Unfortunately, the
volume on this fund is quite low, suggesting extremely wide bid ask
spreads for all investors.
iShares MSCI ACWI ex-US Financials Sector Index Fund
(AXFN)
For a broad look on financials outside of the U.S., iShares’
AXFN makes for an intriguing choice. The ETF charges investors 48
basis points a year and holds about 260 stocks in its basket, by
far the most on this list (see more on the Zacks ETF Center).
Once again, this ETF has a one year standard deviation over 53%,
suggesting high levels of volatility on a regular basis. This comes
despite a majority of the assets going towards value stocks as well
as those that are in the large cap space.
The risk probably comes from the heavy European exposure (40%)
and the decent amount of emerging market assets. In fact, China
finds its way into the top five along with the UK, Canada,
Australia, and Japan. Additionally, the U.S. dollar makes up just
12% of the holdings, implying that foreign currency risks are a
major concern for investors in this fund.
In terms of performance, the product has added about 11.4%
although it is currently trading at a 2.9% discount on extremely
low volume. This produces wide bid ask spreads although the 30 Day
SEC yield of 3.3% is likely to provide some comfort to those who
are long this ETF.
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