- The oldest Financial sector ETF available has underperformed an S&P 500 index fund by 2.30% CAGR over the last 20 years
- There are currently 32 Financial sector ETFs available; 16 of these are 10 years old or older
- Why this Deep Value ETF Accumulator does not invest in Financial sector ETFs
The Financial Select Sector SPDR® Fund (XLF) is the oldest available Financial sector ETF. Its’ inception date was December 16, 1998. The Great Financial Crises of 2007-2009 decimated this sector of the market. Because the Financials were the most severely wounded sector, the associated ETFs have failed to keep up with the returns of the broad U.S. Markets or any other sector of the market. Therefore, investors will find it difficult to find a “good” Financial sector ETF with a history of great returns. This is why you will see the XLF ETF significantly lagging the S&P 500 in the following charts.
XLF vs S&P 500 index fund: January 1999 – November 2018
Source: https://www.portfoliovisualizer.com/
XLF vs SPY: December 22, 1998 – December 11, 2018
Source: https://www.koyfin.com/home
Morningstar shows 32 ETFs in the Financial category. Exactly half of these ETFs have been around for 10 years or longer. I have compared the performance of each of these older ETFs head-to-head with the back-testing tools at Portfolio Visualizer and Koyfin. I did not consider valuations, quality of holdings or any other metric to make these rankings.
Source: https://www.morningstar.com/
The 4 best performing Financial sector ETFs were KIE, FXO, RYF and IAI. The following charts will show how these 4 ETFs compared to each other and the S&P 500 over the last 11 ½ years.
KIE vs FXO vs RYF vs IAI: June 2007 – November 2018
Source: https://www.portfoliovisualizer.com/
KIE vs FXO vs RYF vs IAI vs XLF vs SPY: May 10, 2007 – December 11, 2018
Source: https://www.koyfin.com/home
To get a better understanding of how these top 4 performing Financial sector ETFs are built, let’s look at their stated objectives and product summaries.
KIE – The SPDR® S&P® Insurance ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P® Insurance Select Industry Index (the “Index”). Seeks to provide exposure the insurance segment of the S&P TMI, which comprises the following sub-industries: Insurance Brokers, Life & Health Insurance, Multi-Line Insurance, Property & Casualty Insurance, and Reinsurance. Seeks to track a modified equal weighted index which provides the potential for unconcentrated industry exposure across large, mid and small cap stocks. Allows investors to take strategic or tactical positions at a more targeted level than traditional sector-based investing.
FXO – The First Trust Financials AlphaDEX® Fund is an exchange-traded fund. The investment objective of the Fund is to seek investment results that correspond generally to the price and yield, before fees and expenses, of an equity index called the StrataQuant® Financials Index. The StrataQuant® Financials Index is an “enhanced” index developed, maintained and sponsored by ICE Data Indices, LLC or its affiliates (“IDI”) which employs the AlphaDEX® stock selection methodology to select stocks from the Russell 1000® Index. IDI constructs the StrataQuant® Financials Index by ranking the stocks which are members of the Russell 1000® Index on growth factors including three, six and 12-month price appreciation, sales to price and one-year sales growth, and, separately, on value factors including book value to price, cash flow to price and return on assets. Stocks which Russell has classified solely as growth or value, receive their score using the above growth or value factors respectively. Stocks which Russell allocates between both growth and value receive their best score between the growth and value factors. IDI then ranks those stocks contained in the financials sector according to their score. The bottom 25% is eliminated and the top 75% is selected for the StrataQuant® Financials Index. The selected stocks are divided into quintiles based on their rankings and the top ranked quintiles receive a higher weight within the index. The stocks are equally-weighted within each quintile. The index is reconstituted and rebalanced quarterly.
RYF – The Invesco S&P 500® Equal Weight Financials ETF (Fund) is based on the S&P 500® Equal Weight Financials Index (Index). The Fund will invest at least 90% of its total assets in common stocks that comprise the Index. The Index equally weights stocks in the financials sector of the S&P 500® Index. The Fund and the Index are rebalanced quarterly.
IAI – The iShares U.S. Broker-Dealers & Securities Exchanges ETF seeks to track the investment results of an index composed of U.S. equities in the investment services sector. Exposure to U.S. investment banks, discount brokerages, and stock exchanges. Targeted access to domestic investment services stocks. Use to express a sector view.
In the past, I have refrained from going through the effort of ranking the Financial sector ETFs because the results were poor, and I knew that I wouldn’t be investing in one of these ETFs. But, I have had several readers inquire which Financial sector ETFs I would recommend. So, even though I won’t be investing in this sector, I could still produce the data. I invest in 31 different ETFs which give me exposure to most of the publicly traded companies across the globe. Some of the ETFs that I invest in also have low returns compared to the S&P 500, but there are other compelling reasons to own them. For example, the 2 Emerging Markets ETFs that I own have significantly underperformed the S&P 500 since their inception dates. But, there is compelling data that is older than the ETF industry that shows that emerging markets can and do outperformed the S&P 500 over very long periods. I have no such data that shows the Financial sector outperforming the broader markets. In fact, one could surmise that the Financial sector is a potential drag on the performance of broad market ETFs. For those who want exposure to the Financial sector but do not want to own a Financial sector fund, you will get plenty of exposure to this sector through your broad market ETFs. For example, a typical S&P 500 fund, such as SPY, has 13% of its’ portfolio in Financials. A typical mid cap blend fund, such as MDY, has 16% in Financials. And a typical small cap blend fund, such as IWM, has 18% in Financials. For these reasons, this Deep Value ETF Accumulator does not invest in any Financial sector ETFs.
Thank you for taking time to read this article. If you found it useful, please share it with a friend.
Respectfully yours, Micah McDonald, aka the Deep Value ETF Accumulator
Disclosure: I am not a professional investment advisor. Please perform your own due diligence or seek assistance from a Registered Investment Advisor prior to investing in any fund mentioned in this article.